'One-off receipts make fiscal consolidation less credible'

D Subbarao’s tenure as the RBI governor was marred by three major issues — Great Recession, steep inflation in the early 2010s, and currency depreciation in 2013. Just 11 days into his job, on September 16, 2008, Lehmann Brothers crashes. What followed was a mayhem of crashes and financial institutions and banks fell like nine pins. Inflation and currency depreciation were so steep that it became the prominent part of political discourse in the country for the first time. To his credit, not a single bank in India collapsed. The inflation, according to a lot of experts, was because of three fiscal stimulus packages, and the failure to withdraw them, which set the economy in a wild goose chase, putting inflationary pressure on the Budget. The currency depreciation could be majorly attributed to ‘taper tantrum’ by Ben Bernanke, the then Fed Reserve chief.

In an interview with Furquan Moharkan of DH, Subbarao talks about the Monetary Panel Committee (MPC), his opinion on Marginal Cost of Funds-based Lending Rate (MCLR), and the legacy of outgoing RBI Governor Raghuram Rajan. Throughout his interaction, Subbarao seemed very optimistic about the prospects of the Indian economy. Excerpts:

What do you think of the Monetary Panel Committee? Do you think that the government is trying to meddle with the affairs of RBI?
No, I don’t think so. I don’t think that we should see conspiracy theories in this. The Monetary Panel Committee has been sanctioned long back. I have spoken about this. P Chidambaram, the then Finance Minister, had also spoken about it. It is not a new idea. It’s incidental that it has come to fruition now. I think it will be completely misplaced to see any conspiracy theories in this.

Transmission of interest rates has always been a problem. Raghuram Rajan came up with MCLR recently. How do you see it panning out further?
Well, the Reserve Bank is always concerned about the transmission of its policy. Every central bank makes an adjustment in the policy interest rate expecting that change will influence the entire interest rate structure in the economy. So, if the transmission doesn’t take place at a certain level, then it is a matter of concern.
Earlier, there used to be certain impediments to monetary policy transmission, including the administered interest rate regime, the high fiscal deficits of the government. Some of those things have been addressed now. For example, the government is on a fiscal consolidation drive, administered interest rate regime is being dismantled, oil prices have come down, there is better food distribution.
RBI on its part, ensures that banks adhere to monetary policy changes, in a way of liquidity management.

You spoke about fiscal consolidation. This year, after so many years, we adhered to fiscal targets. But that was not due to some structural changes, but because of one-time revenue. So do you think that fiscal consolidation is a distant mirage?
You are right. We are looking for a structural correction, in fiscal policy. This has to come through measures which are continuum in practice. If fiscal consolidation is achieved through one-time measures, it is less credible. But let us give the government, the benefit of the doubt. They have appointed a committee to advise on the long-term fiscal path, and I am sure that they will carefully consider the recommendations of the committee.

Your opinion about Raghuram Rajan’s tenure and legacy?
Rajan is leaving behind a very rich and enduring legacy. He will be remembered for monetary policy framework, especially the MPC and inflation targeting. He will be remembered for the banking licences on tap. He will be remembered for all the innovations he brought into the payment and settlement system to make financial inclusion deeper and more robust. He is leaving behind a rich legacy.
 
Do you think he has set a benchmark for all governors to follow?
Oh, certainly! Every governor sets a benchmark for next ones to follow. (laughs)