Finals Are In 2016; Next Year Is Just The Semi-Final

Last time I said it, it sounded like a terrible cliche. But, the six months that lie between now and the general elections scheduled for March-April 2014 do indeed seem like a lifetime. And, despite the fact that a major indicator -- results of the elections to four state assemblies in November and December, 2013 -- is still in the works, some indications of the April 2014 hustings are already acquiring a distinctive shape.

So here is the prognosis (and I reserve the right to update it as the months roll out): 2014 will be more like a semi-final and the final will be played out only in 2016. Which means the new government -- whichever combo it is -- will not survive for too long. It will be done in by its own inherent contradictions, much like some of the previous short-lived formulations.

There is a piece in FirstPost already hinting at it (read it here) also, though the overall thrust of the piece is about the souring relations between the Gandhi family members and prime minister Manmohan Singh. But, we've already covered it in an earlier posting about how and why the ordinance was canned by Rahul Gandhi.

So, why am I expecting an anti-climax in 2014?

Look at it this way. Narendra Modi and his followers are desperately trying to convert the elections into a presidential format -- an exclusive battle of wits between him and Rahul Gandhi, or NaMo versus Raga, somewhat like the next highly-billed heavyweight bout at Las Vegas. BJP hopes this format will help it iron out some of the wrinkles presented by a fractured Indian polity, notably the rise of regional parties and coalition politics of the past 20 years. From all available accounts, the Modi camp wants at least 200 seats and the only way to go about it is to pitch him mano a mano with the leader of the ruling party.

Narendra Modi (left) and Rahul Gandhi (Photographs courtesy PTI Photos)

Yet, too many regional issues might still take precedence. For instance, the Telangana-Seemandhra fissures will surely be priority Number One for the Andhra voters, Delhi be damned. So, despite Chandrababu Naidu hitching his wagon to the NaMo star early in the race, Jagan Reddy might be holding most of the aces. In Bihar, while Lalu has been put away, the usual concerns of poverty, lawlessness, entitlements, etc will still dominate the campaign rhetoric. Uttar Pradesh will be battling the after-effects of the Muzzafarnagar riots. Post Phailin, voters in Orissa are still picking up the pieces. Mamata will bring a number of MPs from West Bengal to the negotiating table, even if they're a diminished lot. In Maharashtra, Raj Thackeray's MNS and Sharad Pawar's National Congress Party are both gearing up to corner as may negotiating chips as possible.

These factors have already been put into play and the BJP's attempts to turn this election into a NaMo-versus-RaGa spectacle might not yield any dividends. At least, not yet.

Congress, on the other hand, leaves behind a terrible record of governance. Their feeble attempt to win votes through the cash entitlement route can be a winner but not if some other narrative overwhelms it. And, BJP is trying to do just that with its unwavering focus on corruption during the UPA years. Congress has also conveniently found its straw-man in Manmohan Singh, and is fervently hoping that RaGa's family connections (hence his continuing references to his father's and grandmother's assassinations), his faux earnestness and his boyish charm will win the day.

However, both NaMo or RaGa will have to contend with a number of regional satraps with increased negotiating power. Expect a flurry of post-poll arrangements, tie-ups, understandings. And, this is likely to erode the decision-making powers of whichever government occupies the corner office. This is not an altogether welcome development, given that the country is looking forward to some decisive actions, some measures that will help nudge the economy back into growth mode.

Alongside, expect prolonged and public bickering over who gets which ministry. Most political parties still view governance as an entitlement to loot. This is evident from the fact that most leaders have inducted their sons and daughters as their successors. This rather unseemly squabbling over fish-and-loaves of office will also be another reason for the dissolution of the government in power.

On to 2016 then. In the meantime, enjoy the show. And keep an eye on that chap called Arvind Kejriwal. He seems to be just warmin' up.

When The Postman Knocks...

Finance minister P Chidambaram recently stated that Reserve Bank of India is likely to issue licences to seven new banks (read here). A total of 26 applicants had applied to be awarded banking licences. The FM's comments have immediately sparked off a guessing game about the identity of the lucky seven. 

We are loath to give up an opportunity to speculate; we will therefore definitely hypothesize about the lucky seven. But that is for a later posting. For the moment, let us focus on another important aspect. Mr Chidambaram also said that these new institutions should strive to create new banking templates and not follow the business model adopted by the existing, new-generation, private sector banks. One tends to agree with him, though the scope for innovation in the Indian financial sector does seem quite limited, what with the numerous regulatory and political obstacles erected for banking operations.

Whatever be the message, one only hopes that the FM's imprimatur of avoiding clones doesn't force the central bank to grant a banking licence to the postal department. The postal department is claiming that its massive network gives it access to almost all corners of the country, including large areas which go either unserved or under-served by formal banking practices. While the postal department is undoubtedly the only organisation with the largest physical presence in the country, is that a necessary and sufficient condition for granting a banking licence?

This is not to say that the postal department hasn't done a great job. The postal department has played a stellar role in stitching disparate parts of the country into a cohesive whole, managed to reach the earnings of migrant workers from one corner of the country to their families in another corner, tended to the fires of communications across languages and regions, and much much more.

But does all this still qualify for a banking licence? I don't think so. I had earlier written about it in a guest column for magazine Outlook (read here). 

Political pressure forces the postal department to sell most of their products below cost of production, thereby painting the bottom-line luxuriantly red and requiring infusion of fresh funds from the government every year. This is the main reason why the postal department should not be given a banking licence. The postal deficit for the past two years and this year's budgeted deficit are given below (in rupees crore):

2011-12            2012-13               2013-14 (Budgeted)

5716                  5838                       6717

The government, as things stand, needs to infuse large doses of capital into public sector banks every year (Rs 16,000 crore has been earmarked for government owned banks and financial institutions during 2013-14). Therefore, adding another colossal institution which is likely to absorb large amounts of cash every year is diverting additional amounts of the government's limited resources, which could be better used for development purposes.

Postal departments in many other countries launched banking services at various times in the past -- such as, Deutsche Postbank in Germany (which is now owned to the extent of 94% by Deutsche Bank), Japan Post, Postbank N.V. in The Netherlands which has since been acquired by ING Bank, POSBank in Singapore which has been bought over by DBS Bank. The lesson from the above examples is clear -- all the postal banks had to be acquired by private banks. The two exceptions might be China -- The Postal Savings Bank of China -- and Brazil's postal services, which had to tie-up with a private bank (Bank of Brazil) to gain access to financial products and  services.

With such a wealth of experience available globally, a rethink might be necessary before allowing India Post to diversify into banking services. An alternative strategy would be leverage the same network to allow marketing of third party products.

The Ordinance Gambit: Strategy Or Tactic?

All in all, Congress must be licking its chops for seemingly executing a neat political strategy. But there could be some deleterious collateral damage lurking in the shadows. It now turns out Manmohan Singh will have to become the fall guy for having persisted with an ordinance that allowed elected legislators with criminal convictions to continue in Parliament.

For those who tuned in late, the Cabinet passed an ordinance on September 24, 2013, called Representation of the People (Amendment and Validation) Bill, 2013. The ordinance sought to negate a Supreme Court ruling of July 10, which said that legislators would be disqualified immediately if convicted by a court for a sentence of two years or more. The immediate concern for rushing ahead with an ordinance – instead of waiting for Parliament to reconvene – was apparently the imminent sentencing of RJD chief Lalu Prasad Yadav (an important ally for Congress ) and Congress politician Rasheed Masood. The BJP – which was ambivalent initially –  weighed its assets against its criminal liabilities and figured opposing the ordinance made more sense.

Then as suddenly as the ordinance was sprung on an unsuspecting public, Congress vice-president Rahul Gandhi parachuted into a press conference being addressed by Ajay Maken and announced his displeasure with the ordinance. He called the ordinance “a complete nonsense” and suggested that it be “torn and thrown away!” There was a collective gasp from across the country because this comment was made when the prime Minister was in USA. As soon as he returned, in a show of amazing alacrity, the same Cabinet withdrew the ordinance on October 2. (for a complete chronology of events, read here)

Manmohan Singh & Rahul Gandhi in happier times. Pix courtesy of AFP

What does all this indicate? Here are a few stray thoughts and my take on the entire episode:

* This was a deliberate ploy. It was planned and executed to make Rahul Gandhi come out smelling like roses. The casualty will be the Cabinet members, who are all older than the young party vice-prez. The upshot, as Congress poll managers would want it to appear: the geriatric Cabinet wanted to protect status quo but the vigilant youth forced the change.  This hypothesis seems credible because one suddenly noticed Congress party lightweights, considered to be members of RG’s charmed circle, openly tweeting against the ordinance even before the dramatic press conference (read it here). It seems unlikely that, under normal circumstances, they would have had the gumption to openly criticise an ordinance cleared by the Cabinet. Unless of course they had instructions from somebody senior in the party.

* The party went ahead with the ordinance in the belief that all parties would support it. But, with elections so near, BJP stole some of the television thunder by publicly venting their ire against the ordinance. They even met the President to express their disappointment with the proposed legislation. Public mood seemed to be turning against the ordinance; there were rumblings within other political parties too. Civil society was agitated. Sensing that the mood was turning, Congress must have decided to turn the liability into a show of virtue.

The collateral damage could be Manmohan Singh who comes out of this episode looking rather sheepish and servile. He also emerges as a political relic, charging down the road with a legislation that favoured a venal brand of politics. He is also likely to be branded – subtly of course – as the man who was responsible for wrecking the economy and somebody who now must make way for the impatient and ambitious youth.  This is unfortunate and undeserved for MMS – it's like a bum ride into the sunset for somebody who went through public life with his probity and value system intact.

But there could be one proverbial fly in the ointment – the deliberate slight to Manmohan Singh still raises issues about dynastic politics. This may not go down well with young voters and, as sure as the sun rises from the east, the Opposition isn’t likely to let this opportunity slip away. In the end, it will be interesting to see who and what influences the young finger on the button.

The Political Overlords Of A Violent Underclass

Violence has become Indian society's default template. This is ironic for a country that gained independence from colonial powers by using the politics of non-violence. What is even more appalling is that this violent streak in society is sponsored and patronised.

I wrote an Op-ed piece for The Hindu on the sponsorship for such wanton violence. My piece can be found here: http://goo.gl/z82277

Money As 'Social Technology'

Money has fascinated as well as bewitched mankind for centuries. How was it born? How did it become popular? Many books have been written on the history of money. Here is another book with an interesting hypothesis about how money came into being and what constitutes money.

My review of the book was carried by Business Standard today (http://goo.gl/k6QZ8l):

Mankind felt a compelling need to give it physical shape, even though it resides mostly in the head. It's universally coveted, yet it is willingly and freely exchanged. Meet this unique commodity called "money", which is probably mankind's most remarkable - and paradoxical - innovation to date. Stripped of its basic functions and viewed from different vantage points, it has provided grist for every philosopher's mill - explanations for the entire spectrum of human frailties. Money, in short, is intriguing yet simple, notional yet real.

No wonder, then, that it has inspired numerous writers across generations. Here's an easy exercise: go to amazon.com and type in "money" in the search bar. You will see the number of books that pop up, including some in the fiction genre (sample Money: A Suicide Note by Martin Amis, a part of the London Trilogy). Some of the books written about the history of money have remained outstanding works on the subject. John Kenneth Galbraith's Money: Whence it Came, Where it Went was less known than some of his other books, but it was as much a pleasure to read. A more recent book is Niall Ferguson's The Ascent of Money, which has won some acclaim but has also generated heated debate, especially since the book's unabashed and ill-timed hymn to capitalism was rudely overtaken by the global financial crisis.

Along comes another book that purports to tell the truth about the origins of money and the peculiar mechanics that make it tick. It also goes boldly where no book has gone before; it claims that the popular belief that societies have used a system of barter is built upon an elaborate myth. Different societies, at different times, have used several versions of what they considered money - sea shells, large circular stones, leather tablets, pebbles, coins and, with the advent of the printing press, paper money. But the author's contention is that money is not just a medium of exchange or solely a repository of value. At its heart, it's a system of credit and debit that allows people to trade and deal with each other. Money, it seems, is the best credit rating for any economic agent. Money also helped ancient societies unhook themselves from the hierarchical yoke of social burdens.

The author buttresses his hypothesis by citing Ireland's example. In the 1970s, all banks in that country had to be closed for seven months owing to a labour dispute. This forced everyday commerce and trade to depend on cheques (which couldn't be banked) and IOUs, which rapidly assumed the form of an alternative currency. Trust and a personal assessment of risk lubricated dealings in this new arrangement. The author contends that this is nothing but money, because even though the centralised monetary system had broken down, housewives still bought milk and bread, publicans continued plying regulars with their pints, and the small businessman managed to buy his raw materials. At work was the credit and debit that each person maintained against another in the economy, which was tradeable and hence eligible to be called money.

Therefore, apart from facilitating commerce, money also organises society and creates some sort of social order and cohesion. This, then, debunks another important and prevailing concept about money: only sovereigns can issue money. So, if we stay on with the Irish example, the author contends that even though the banks - the main purveyors of currency in any economy - were shut for seven months, the economy didn't come to a standstill. An alternative system sprung up all the same. He concludes that money is nothing but a "social technology".

The author, a scholar of classics and economics, has managed to provide a grand sweep of history and sociology to present his views on money. This book is, therefore, less of a biography and more of a well-strung and interesting necklace of ideas, hypotheses and theories. And we wish he had not walked into the same trap as some of his predecessors (including Galbraith): they often ended their books with a homily or a home-grown theory about the future, especially about the conduct of monetary policy. His contention is that the system of tradeable credits - since it is just one step away from speculation - is bound to lead to a succession of financial crises. His prescriptions for greater state support and narrower banking practices are inherently impractical and unlikely to find popular support.

MONEY: THE UNAUTHORISED BIOGRAPHY

Felix Martin

Bodley Head (a Random House imprint)

327 pages; £14

The Great Indian Rupee Trick - Redux

A lot has already been written about why the Indian rupee has gone into a free-fall. Some of it is utter nonsense, such as stuff which claims rupee should actually be appreciating instead of depreciating. But, otherwise, the narrative has mostly been sane and restricted to the straight and narrow.

What, however, does not get written is Indian government's strategic intent, or the lack of it. Most analyses tend to paint the Indian government as a hapless bystander, hit athwart and stunned by debilitating global financial flows. The fact is this: the portends were strewn in the four winds many moons ago. But, our policy makers were busy frying other fish.

Authorities have been blaming "global conditions" for the rupee volatility. This is an euphemism for Federal Reserve Bank's loud thinking about ending its accommodative monetary policy, or now known as "tapering" in the international bond markets. In essence, it implies the Fed is thinking aloud about when to start reducing (or tapering off) its $85-billion-a-month bond buying programme. 

Arguably, if this does materialise (as some are convinced that it might in September or October), then interest rates in the USA are bound to rise from their current near-zero levels. Plus, that would also imply an improvement in the US economic prospects, because the Fed has categorically stated that it would "taper" only if unemployment rates fall and inflation bumps up.

Now, given all the problems with the Indian economy -- widening current account deficit, slowing economic growth, stubbornly high consumer inflation, stagnant industrial production, a spike in short term foreign debt, growing reliance on populist measures, corruption scandals and impending elections -- the US bond market definitely looked more interesting. Therefore, as soon as news started filtering in about "tapering", investors dumped Indian stocks and bonds and rushed to get back into dollar assets, such US treasury bonds.

This rush to sell Indian assets, take the rupees and exchange them for dollars, created a spike in demand for dollars, leading to the rupee's fall. As the rupee started to fall, more investors started getting out because staying on would mean a further erosion of yields. This self-perpetuating crisis was fed a bit of fuel by emergency measures implemented by Reserve Bank of India.

One leg of the strategy should have been to encourage flow of foreign direct investment which is typically sustainable and long term in nature. But they made a complete mess of it.

But the point here is that the Fed has been talking about "tapering" for quite some time. Sample Fed chairman Ben Bernanke's testimony to the joint economic committee of the US Congress on May 22: "At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes." (read it here)

On the same day, the Fed released the minutes of the meeting of the Federal Open Markets Committee (the round table of Fed knights that sets the interest rate) held on April 30 and May 1. This is the paragraph that showed up on investors' radars with a loud bleep: "Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September...A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately..." (read the full text of the minutes here)

Fed chairman Bernanke testimony to the US House of Representatives on July 17 had similar strains (read it here). Please note: he never once mentioned that the Fed had decided to withdraw the accommodative measures, leave alone finalising a date to begin the tapering off. He only reiterated that the economy was doing well, there was still some distance left to cover, that the expansionary strategy would continue even after Fed began  "tapering off" and so on.

In addition, many Fed governors had been debating the same point -- about the appropriate timing of the Fed's "exit strategy" -- in their various speeches for months. 

It is, therefore, surprising that while the whole wide world, its grandmother and all the portfolio investors could feel their antennae tingling, the Indian government and its various policy-making arms were oblivious to these developments. There was no counter-strategy, no emergency measures. Nothing.

Forget the past six months. Ever since Fed launched its expansionary monetary policy and flooded the global markets with excess liquidity, it was well known that this money would flow back as soon as there were hints of increases in US bond yields. And, yet they dithered. 

A columnist in Washington Post also said:  "The Fed has telegraphed the tapering and eventual end of its QE policies with with increasing specificity for months now, so you would expect, in a perfectly rational world, for currency and bond markets to have long ago priced in plans of Bernanke & Co. The wild thing about the most recent bout of market volatility in the last few weeks is there's been no earth-shattering news about the prospects for the Fed tapering and then ending its bond purchases. Both US economic data and comments out of senior officials have been broadly consistent with where they were a month ago." (read the column here).

There's only option left now: pray.

When Harry Met Keynes

The financial crisis of 2007-08 has sparked a renewed interest in the Bretton Woods compact, which created a "prosperous" world for about 20-30 years. Academics across the world have been wondering whether the world needs a new agreement and new institutions to meet the demands of a new economic order. The perception is that the 44-nation Bretton Woods discussions, which gave birth to the multilateral institutions World Bank and the International Monetary Fund, were held in a generally conducive and collegial atmosphere. This is not true. A new book on the Bretton Woods discussions -- The Battle of Bretton Woods by Benn Steil --  shows how the talks were held in a generally combative atmosphere.

My review of the book was carried by Business Standard (http://goo.gl/s758Q). Here it is:

In a rare photo op, the heads of the World Bank and the United Nations flew to violence-scarred East Africa recently. There was nothing spectacular about this visit - it showcased two ageing international bureaucrats posing together and providing sound bites about how their respective institutions were willing to work together to bring peace to this war-ravaged region, also known as the Great Lakes region. It could well be a convergence of coincidences: both dignitaries happened to be there at the right time, and both were born in Korea.

But there was another bit of detail that made this visit interesting and historic: this was probably the first time these two multilateral institutions were actually seen working together and promising to enhance this co-operation in future. Though they had made similar noises in the past, they unfailingly broke their promises. Both institutions, with unwieldy and terribly insular bureaucracies, have been distrustful of each other.

The genesis of this strife and suspicion towards each other can be found in the circumstances surrounding the birth of the World Bank along with its sister institution, the International Monetary Fund (IMF). Both these multilateral agencies were the outcome of a post-Depression meeting comprising 44 nations in a small New Hampshire town called Bretton Woods. The meeting, which was held in Mount Washington Hotel, was aimed at creating a lasting post-war global economic compact - an agreement that would lay down the long-term blueprint for global economic prosperity.

In reality, the conclave turned out to be a contest between two powers: the United Kingdom, a waning imperial power keen to reverse its ebbing national self-esteem; and the United States of America, the global superpower eager to leave its imprint on the global economy.

At first sight, the dice seemed loaded in favour of the UK team, which included the first celebrity economist of modern times, John Maynard Keynes. His formidable reputation, his distaste for intellectual lightweights, his irascible temper, and his sharp tongue gave the British side a psychological advantage. Keynes had been planning to create an international currency union, which would launch its own international currency - "bancor", an alternative to the all-powerful dollar - and lend to indebted countries such as Britain.

But the American side had a surprise: Harry Dexter White, a dogged and industrious bureaucrat who enjoyed the confidence of Henry Morgenthau Jr, then Treasury secretary. White, a Harvard-trained economist, had been hatching a plan to create an international stabilisation fund. This fund would not only lend dollars to debtor countries, but also stabilise currency movements across the world by convincing countries to peg their currencies to the dollar and, in turn, peg the dollar to a fixed gold price.

When Keynes' and White's plans collided at Bretton Woods, the result was the birth of the IMF. History shows that the discussions took place in a collegial atmosphere, but author Benn Steil's latest version injects an undercurrent of understated hostility, marked by a sparring match between two monumental intellects, and egos.

Differences even crept up as to where to locate the IMF - Keynes felt New York (in close proximity to the UN's Economic and Social Council) was ideal, but his suggestion was railroaded by the US' preference for Washington, DC. The dividing lines were also quite pronounced about the IMF's future role.

A book that describes in detail such a conference, its leading characters, and changing moods and directions is usually as dull as dishwater. There are quotes from agendas, memos, official correspondence, file notings, research papers and personal letters. What saves the day, or adds colour, is the insight into the character of White, whose personal papers were made public only recently. He was believed to be a Russian spy and was accused of passing on the details of the Treasury department's plans and former US president Franklin Roosevelt's thoughts to his contacts in the Russian embassy. Mr Steil has refrained, sensibly, from dwelling too much on Keynes' homosexuality and its presumed impact on policy making, as some right-wing historians have tried vainly in the past.

The book's over-reliance on minutiae can be crushing, but given the renewed interest in economic history - especially the Great Depression and the creation of the Bretton Woods institutions - Benn Steil cannot be faulted for his timing.

THE BATTLE OF BRETTON WOODS
John Maynard Keynes, Harry Dexter White, and the Making of a New World Order
Benn Steil
Princeton University Press
449 pages; $29.95

Heady Days For Finance

The Economic Times today carried an Op-ed piece written by me. Here it is.

Heady Days For Finance

Exciting proposals to overhaul the financial services sector are on the table — implement them

The financial services sector could be in for exciting times, if proposals now on the table are anything to go by. Many changes are being proposed and if these get implemented, the sector is in for massive churn. Spoiler alert: some legal hurdles could still play spoilsport.

First out of the gates is likely the issue of new bank licences. A range of new players is likely to get a shot at opening new banks. Banking is still considered a coveted business segment in India despite many risks and overwhelming regulation. This is because of two reasons. One, a growing economy will need credit to expand and build new infrastructure. In India only banks can offer savings bank deposits, which work out cheaper than other sources of finance. 

The real fun and games can be expected to kick off when the changes suggested by the Finance Sector Legislative Reforms Commission, a body set up by the finance ministry to look into the raft of laws and structures in financial services and suggest ways to recast them, are implemented. Going by the approach paper released by the commission recently, some of the changes have the potential to be a game-changer.

Under the proposed structure, the financial sector will have seven main pillars. Two proposals stand out. One is to convert the Reserve Bank of India into a pure-play monetary authority (with debt management of government bonds housed in a separate, independent office), one that will enforce consumer protection and micro-prudential laws in banking and payment systems. The second is to create a unified financial regulatory agency by collapsing different financial sector regulators into it: Sebi, Irda, PFRDA and the Forward Markets Commission.

The proposed structure is likely to create a completely new architecture for financial services regulation. The new design will be achieved primarily through re-visiting the sector’s existing legal framework, which is at odds with the changed financial landscape. As the approach paper mentions, the sector is governed by 60 Acts and multiple rules and regulations. According to the paper: “The superstructure of the financial sector governance regime has been modified in a piecemeal fashion from time to time, without substantial changes to the underlying foundations... The piecemeal amendments have generated unintended outcomes including regulatory gaps, overlaps, inconsistencies and regulatory arbitrage.” 

In all the changes being contemplated, there are two legislation-related challenges. 

• The commission is duty-bound to re-examine legislation governing central banking. The RBI Act was enacted in 1934 and is still a ‘temporary’ piece of legislation. But the real issue seems to be designing the right framework that enhances RBI’s independence as a monetary authority, insulated from the executive’s short-term outlook and pressures.

The commission does promise to “…draft a monetary policy law emphasising the issues of independence, enumerated objectives, enumerated powers, and accountability mechanisms.” The RBI Act has to be overhauled since it seems to have been designed to give control to the government, like the power to appoint the governor and his deputies, power to vary their tenure, power to issue directions (after ‘consultation’ with the governor), and so on. The challenge, of course, is marrying independence with accountability. The approach paper says that one of the strategies used globally is inflation targeting. However, RBI has rejected this time and again primarily because most of the factors influencing inflation in India are outside the central bank’s controls.

RBI’s website says: “The formulation, framework and institutional architecture of monetary policy in India have evolved around these objectives – maintaining price stability, ensuring adequate flow of credit to sustain the growth momentum, and securing financial stability.” Enumerating these can be tricky; as goalposts, they need to be moved around every time the landscape alters. 

• The commission has to remember that states also have varying degrees of interest in financial services. These could have a disruptive influence on the normal functioning of financial services. The Andhra government’s intervention in microfinance is a recent example.

The confusion arises because of the legal framework. The Constitution empowers states to legislate on moneylending and moneylenders. As a consequence, there are 22 Acts on money-lending enacted by different states (some states like Andhra and Orissa, have two Acts). However, provisions of these acts, which deal mainly with registering, licensing and regulating moneylenders, are mostly ignored, especially when the moneylenders are politically connected. The conflict heightens when the formal banking system encroaches. A technical working group was set up by RBI in 2006 to study the legislative framework for moneylenders. This group mentioned the need to modify existing legislation, but shied away from suggesting an overhaul of the framework. The commission now has the chance to do so, even if that requires Constitutional amendments.