“Quest for restoring financial stability in India”, is a collection of sixteen speeches and the entire set of monetary policy minutes penned by Dr Viral Acharya, during his stint as Deputy Governor of RBI between January 2017 and July 2019. In terms of the research, effort and sheer passion behind these works, the collection is a veritable treasure trove, even for those that may disagree with some of the conclusions.
To knit the diverse themes across the speeches into a unified framework, Viral has written a comprehensive preface for the book titled “Fiscal dominance – a theory of everything in India”. The book also contains a masterly and candid foreword by the one and only Dr Y V Reddy, who provides an insightful historical perspective to buttress Viral’s arguments.
Viral’s (and Dr Urjit Patel’s) stint at the RBI coincided with a surreal phase of RBI-government relations, when some of us first learnt of the existence of Section 7 of the RBI Act. Viral’s hard-hitting speeches, culminating in the memorable A D Shroff Memorial lecture of October 26, 2018, provided a glimpse of just how wide the chasm between Mint Street and New Delhi truly was at the time.
Barring a few tantalizing hints, including in a thoughtfully penned epilogue, the book isn’t a show and tell of what happened backstage during that tumultuous period. Instead, Viral’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 against financial sector loan and bond loss recognition, diluting default disclosure norms, pushing for easy monetary policy, drawing in fickle capital inflows, and raiding RBI’s coffers.
Viral argues that such fiscal dominance leads to crowding out of the corporate sector, external sector fragility, financial sector weaknesses, and poor transmission of monetary policy.
As a way forward, Viral 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, be democratically accountable, and be the voice of long-term reason.
Just like his original speeches did, this book has already excited the full spectrum of reactions. Here are my own quick takeaways.
First, backed by a strong courage of conviction, Viral continues to speak truth to power. Notwithstanding our national motto of “Satyameva Jayate” – truth alone shall prevail - we have trouble in acknowledging the truth. As Dr Reddy points out in the foreword, our fiscal math now has an “official deficit” and “real deficit”. Likewise, as Viral points out, the true extent of asset quality stresses in our financial services ecosystem has been clouded by lax recognition, provisioning and disclosure standards. Much of the pressures that Viral attributes to fiscal dominance can be traced to our inability or unwillingness to confront the truth. Viral doesn’t argue for truth for truth’s sake alone. Recognizing 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, Viral presents an excellent 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 over-arching theme behind most actions of the government? How did New Delhi view the standoff with the RBI at that time? Viral has thrown in fairly sharp and intelligent arguments that decry the government’s narrow and opportunistic short-term outlook, and someone ought to cogently argue New Delhi’s case.
Third, the debate on the solution set and way forward is still wide open. While Viral 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 Viral 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, Viral’s book sets the stage for constructive debate to continue.
The book has earned advance praise from a breath-taking 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.
Viral has dedicated this book to his late unsung school teacher, Shri 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.
First Published: Aug 16, 2020 1:58 PM IST
