The fallout of overestimated Indian GDP: Scrap RBI’s monetary policy panel or give it a dual mandate?

All  kinds of things being written after Arvind Subaramaniam’s research paper was released which said India GDP growth rate is overstated by 2.5%.

From being labelled a scoot and shoot economist to being accused of intellectual treason! It is such a pity when you are given all the names for merely writing a paper! I mean one can disagree with the ideas but accusing someone of treason! Really? How bad is it going to get? Cannot believe that a leading financial daily actually agreed to publish such acerbic stuff. How low is it going to get?

Anyways, another piece questions the role of RBI’s MPC:

What no one has talked about is the larger implications of overestimating GDP over so many years. In particular, we have to conclude that monetary policy was horrendously wrong. If we have been growing far slower than what the official statistics indicate, then monetary policy should have been much looser, much earlier. But the Monetary Policy Committee (MPC) was on its own trip, and did real injury to the economy.

This should lead to the assertion that the MPC has failed and needs to be wound up. It serves no purpose beyond giving us a sense that it thinks differently from the government, even if it is wholly wrong. It’s like that chowkidar (watchman) who is usually fast asleep, but periodically bangs his stick on the ground to tell residents that he is on the job.

Well, but what can MPC do about this? Its job is not to collect data and is simply basing its decisions based on whatever data it has. What if estimated growth was higher?

Give it growth target:

There is an old saying that if you give someone a hammer, everything begins to look like a nail. This is what has gone wrong with the MPC. It was given an inflation—and inflation only—mandate, and this made it focus, quixotically, on defeating something that simply wasn’t there. Nothing else explains why it continued with one of the highest real interest rates in the world for so long. And, if GDP growth was really much lower than what we had assumed it to be, the MPC was worsening the slowdown with its mindless assertions of monetary dogmatism.

On the other hand, consider how the MPC would have acted if it had been given not only a 4% inflation target, but also a growth target of, say, 6%. Would it still have kept an aggressive anti-inflation stance? If the MPC has a dual mandate, it would have adopted a more nuanced strategy.

I never get this fight between what monetary policy can do. Can it really lead to higher growth? Growth is not about interest rates alone but several other things.

India’s is not a developed economy where RBI/MPC and the finance ministry can act as if the other does not matter. This is why the old system of RBI’s governor being vested with all the power made sense, since the government could always engage him in a conversation. With a six-member MPC, that’s unlikely. There is no evidence whatsoever that RBI governors, when they were in sole charge of monetary policy, performed any worse than how they have fared with five more people to advise them on rate policies.

Clearly, the MPC must either be disbanded or given a new mandate that includes some responsibility for growth as well. As currently constituted, the MPC is a huge waste of time and effort.

But MPC was designed as one saw too many powers reside in the Governor.

I mean this is literally shooting both the message and the messenger…


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