• PAGE ONE
• INDEX
• HOME

Taming of the monetary hawks

N. A. Mujumdar

THE former RBI Deputy Governor, Dr S. S. Tarapore, confesses in his new book, Monetary Management and Institutional Reforms, of being labelled a ``primordial monetary hawk''. Dr Tarapore ranks high on the list of outstanding monetary economists who can s peak and write on the subject with authority and with insight into policy formulation. Hence, his five essays -- on monetary and fiscal policy, banking reforms and the non-banking segments, and developments in the external sector -- should evoke much int erest among analysts of the contemporary economic scene.

To a discerning reader, however, what becomes clear is that the monetary hawks of the 1990s have been tamed, both by the economic turn of events following the mindless pursuit of monetarism and the emerging grassroots realities. The heyday of the monetar ists, when the common refrain was ``there can be no better anti-poverty programme than inflation control'', is over. The monetarists' myth that the central bank's focus should only be on inflation control, to the exclusion of all other objectives, has be en exploded (Business Line, January 18).

Monetary policy is, after all, an adjunct of macroeconomic policy and, hence, its design should be in symmetry with the overall developmental objectives. With a return to a low-interest-rate regime and inflation continuing to be moderate, the RBI has res umed addressing issues of rural credit and is promoting micro-credit institutions. This is a welcome change. The taming of the monetary hawks is, thus, nearly complete.

Nevertheless, major mistakes were committed in the 1990s, all in the name of monetary control. In the early 1990s, the over-zealous attempt to control credit and money saw interest rates soar to usurious levels. The credit squeeze hit even the priority s ectors, including agriculture. The relative size of credit flows to agriculture shrank, and even the small farmer had to pay interest at rates higher than that by big corporates and MNCs. The current distortions in the interest-rate structure is a fallou t of this legacy.

At present, the corporate sector can raise money from banks at a nominal 9 per cent, or effectively at around 6 per cent after taking into account fiscal concessions. Similarly, exporters, as the RBI recently explained, can access bank credit at an effec tive rate of 5-6 per cent. In contrast, the small farmer continues to be charged 12 per cent. The credit target of 18 per cent of net bank credit to agriculture continues to be elusive.

Concessional lending, an integral part of the Indian interest-rate policy, was abolished in the 1990s, perhaps on the ground that in a market-led economy the poor must fend for themselves. Public sector banks (PSBs) began to unlearn, as it were, the art of lending to the priority sector -- something they had so assiduously done during the two decades since nationalisation in 1969. PSBs also acquired an unhealthy appetite for investing in government securities, well beyond the statutory liquidity ratio ( SLR) requirements. At present, such excess investments in government securities add up to a staggering Rs 1,00,000 crore. This is diversion of bank resources away from productive sectors to support government consumption. In a sense, the sad mess in whic h PSBs find themselves is monument to the rapaciousness of the monetary hawks.

That central bank intervention favouring the disadvantaged and subsides, including on interest rates, are part of any civilised society seem to be dawning on the monetarists only now. Economists such as Joseph Stiglitz have been arguing that equity and r eduction of poverty are desirable not only as ends in themselves but also to sustain high growth.

Dr Tarapore's overwhelming concern for the poor is reflected in the following excerpts from his book. Referring to the role of fiscal policy, he says: ``Every government shouts from the rooftops that it really cares for the indigent and every Finance Min ister puts into his Budget speech the right sort of genuflections, but the end result is that the poor remain in their squalid status. If we are sincere about our commitment to reduce the extremes of poverty and we wish to truly honour Amartya Sen, the F inance Minister should forget all the people he has met -- the industrialists, the agriculturists, the trade unions and the economists -- and listen to the NGOs and try and make the life of the indigent a little less horrid.'' (page 140)

In the same context, he makes a plea that ``the government, to be able to claim to be sensitive to the needs of the indigent poor, should undertake concrete action to ensure that coarse grains and pulses are made affordable to the genuine poor.'' (page 1 39)

In a similar vein, Dr Tarapore argues that the Budget should have measures that effectively help the poor. He feels that fiscal distributive justice has been given the go-by, and the fact that individuals can enjoy unlimited tax-free incomes is reflectiv e of a plutocracy. For instance, a dividend income of Rs 5 crore is tax-free, whereas modest interest incomes from banks are not (page 159). Such ill-thought-out fiscal concessions are destroying the fabric of the financial sector.

Says Dr Tarapore, ``...my thoughts go out to those who...do not have access to a simple Disprin or a Crocin. If we are to have a humane Budget for the millennium, it should concentrate less on growth and more on distributive justice...'' (page 164)

Dr Tarapore, in a way, makes one recollect Gandhiji's mission of wiping out the tears of the disadvantaged, the deprived and the dispossessed.

While the monetarists' change of heart is welcome, the onus of reducing poverty or inequalities in income and wealth should not fall wholly on fiscal policy. Monetary policy has its own role to play. For instance, subsided food credit would assist in mod erating prices of coarse cereals and pulses. Or, concessional lending to agriculture, particularly the small farmer, would go towards increasing food production. Self-employment can be promoted by concessional credit and other support mechanisms. The poi nt is, all policies, including monetary and credit, should be anchored in the primordiality of the poverty theme.

How does one reconcile this emerging grassroots reality with a major recommendation of the Narasimham-Tarapore committee in September 2000, that the Government of India should set out to the RBI a single objective of monetary policy, namely, control of i nflation (Report of the Advisory Group on Transparency in Monetary and Financial Policies). The recommendation has become dated. It is unfortunate that the Advisory Group should have termed the current RBI Act `anachronistic'. In fact, tribute should be paid to the founding fathers who had the vision to stipulate the promotion of rural credit as a statutory responsibility of the RBI.

With regard to the ideal monetary/credit policy in the medium term, some lessons can be learnt from the Chinese experience. During the two decades 1978 to 1998, China's annual GDP growth averaged more than 10 per cent. This was rendered possible partly b ecause agricultural growth was at a phenomenal 5 per cent per annum.

There was an explosion of non-farm employment in the rural sector during the period. All activities in relation to enhancing agricultural growth, non-farm employment, micro enterprises, and so on, were supported by appropriate policies, including subsidi sed credit. As a result, poverty was reduced to 6 per cent of the population by the end of the two decades.

The RBI's focus should, therefore, be on promoting agricultural growth and expanding non-farm employment opportunities. Micro-enterprises should be allowed to blossom. All these would involve strengthening the financial infrastructure in the rural sector , by linking banks with non-government organisations (NGOs) and self-help groups (SHGs), establishing a number of micro-credit financial institutions, and networking them with the mainstream financial institutions.

Thus, taming of the monetary hawks is only the first step. Giving monetary and credit policies a human face is the next.

(The author is former Principal Adviser to the RBI.)