The insider’s take: A collection of speeches sets the stage for constructive debate on fiscal stability

August 30, 2020 6:15 AM

As a way forward, the author urges New Delhi to push for fiscal consolidation, reorient government expenditures from revenue to capital account, and ensure honesty of fiscal accounts

A pedestrian walks past the RBI building in Mumbai. Some of Acharya’s hard-hitting speeches provide a glimpse of the wide chasm between Mint Street and Delhi during his stint as deputy governor of RBI between January 2017 and July 2019 (Bloomberg image)A pedestrian walks past the RBI building in Mumbai. Some of Acharya’s hard-hitting speeches provide a glimpse of the wide chasm between Mint Street and Delhi during his stint as deputy governor of RBI between January 2017 and July 2019 (Bloomberg image)

By Ananth Narayan

Quest for Restoring Financial Stability in India is a collection of 16 speeches and the entire set of monetary policy minutes penned by Viral Acharya during his stint as deputy governor of RBI between January 2017 and July 2019.

To knit the diverse themes across the speeches into a unified framework, Acharya has written a comprehensive preface for the book titled Fiscal dominance-a theory of everything in India. The book also contains a masterly foreword by the one and only YV Reddy, who provides an insightful historical perspective to buttress Acharya’s arguments.

Acharya’s (and Urjit Patel’s) stint at the RBI coincided with a surreal phase of RBI-government relations. Some of Acharya’s hard-hitting speeches provided a glimpse of just how wide the chasm between Mint Street and New Delhi truly was at the time.

Barring a few tantalising hints, the book isn’t a show and tell of what happened backstage during that tumultuous period. Instead, Acharya’s unified framework of fiscal dominance argues how the government can, and did, have a perverse stake in areas as diverse as providing regulatory forbearances, diluting default disclosure norms, pushing for easy monetary policy, drawing in fickle capital inflows, and raiding RBI’s coffers.

As a way forward, Acharya urges New Delhi to push for fiscal consolidation, reorient government expenditures from revenue to capital account, and ensure honesty of fiscal accounts. In turn, he asks that the RBI should have a firm commitment to long-term financial stability, enjoy true independence, be guided by objective policy rules such as the current monetary policy framework, stand up boldly to fiscal dominance when it arises, and be democratically accountable.

Just like his original speeches did, this book has already excited the full spectrum of reactions. Here are my own takeaways.

First, backed by a strong courage of conviction, Acharya continues to speak truth to power. Notwithstanding our national motto of Satyameva Jayate, we have trouble in acknowledging the truth. As Dr Reddy points out in the foreword, our fiscal math now has an ‘official deficit’ and a ‘real deficit’. Likewise, as Acharya points out, the true extent of asset quality stresses in our financial services ecosystem has been clouded by lax recognition, provisioning and disclosure standards. Acharya doesn’t argue for truth for truth’s sake alone. Recognising the truth may simply be a prerequisite to addressing India’s economic challenges, just as accurate medical reports are a must for proper diagnosis and treatment.

Second, on the unified theory of fiscal dominance itself, Acharya presents a good theoretical framework of how this might manifest. It is now important to hear the other side of the argument. Is the need to fund an ever-growing fiscal deficit truly the overarching theme behind most actions of the government? How did New Delhi view the standoff with the RBI at that time? Acharya has thrown in fairly sharp and intelligent arguments that decry the government’s outlook as narrow, short-term and opportunistic, and someone ought to cogently present New Delhi’s perspective.

Third, the debate on the solution set and way forward is still wide open. While Acharya has argued for extensive improvements in the quality and extent of India’s true fiscal deficit, it is far from clear how that is to be achieved in practice. In addition, perhaps some of the rules that he extols—such as India’s flexible inflation targeting framework—are kept inherently simplistic, because experts feel the government cannot be trusted with anything more realistic. Finally, perhaps many of the true solutions lie in the real sector, rather than in the financial sector. In any case, the book sets the stage for constructive debate to continue.

The book has earned advance praise from a breathtaking bevy of domain experts, including Mervyn King, Raghuram Rajan, C Rangarajan, Shyamala Gopinath, Maurice Obstfeld, Y Malegam, Easwar Prasad, N Vaghul, Usha Thorat and Rakesh Mohan. On that set of recommendations alone, this book is worth a read—by students, practitioners, commentators, Mint Street and New Delhi. Including, and perhaps especially, if you are likely to disagree with some of the arguments and would like to further the debate.

Acharya has dedicated this book to his late unsung school teacher, Shailesh Shah. He has also pledged all of his earnings from the book to Pratham, an NGO dedicated to the cause of education in India.

Ananth Narayan is professor, finance, at SP Jain Institute of Management and Research

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