‘Respect’ RBI’s Authority To Decide Rates, Arun Jaitley Tells Bloomberg

Is there tension brewing between the RBI and the finance ministry?

Arun Jaitley, India’s finance minister (Photographer: Marlene Awaad/Bloomberg)
Arun Jaitley, India’s finance minister (Photographer: Marlene Awaad/Bloomberg)

Finance Minister Arun Jaitley said the government respects the Reserve Bank of India’s authority to decide rates, after the central bank’s rate-setting committee declined to meet his ministry’s officials ahead of the monetary policy announcement.

The ministry, representing the government, giving its own assessment of the economy to the RBI is the done thing, Jaitley said in an interview to Bloomberg TV.

The six-member monetary policy committee had unanimously declined a meeting with finance ministry officials ahead of the policy review, RBI Governor Urjit Patel said on Wednesday while announcing the policy. He was replying to a question if such a meeting would compromise the RBI’s autonomy.

The central bank’s decision to keep rates unchanged amid a slower growth and low inflation came under fire from Arvind Subramanian, adviser to the finance ministry, who said the RBI made “large forecast errors” and overstated inflation. India’s growth as measured by gross value added fell to 5.6 percent in the quarter ended March from 6.7 percent in previous three months while consumer inflation fell below 3 percent in April.

Jaitley said he expected to the growth to improve as the government continues to spend on infrastructure and clear reforms like a universal indirect tax, billed as India’s biggest reform in more than two decades. Excerpts of his interview...

What can the finance ministry can do to support growth and get things back on a higher track?

First of all let me tell you the word poor may not be appropriate. In the last three years we have had a 7.5 percent, 8 percent and a 7.1 percent growth. Last year on account of global demand being a little depressed, the capacity of Indian banks to support growth being somewhat inadequate, we were anticipating a lower growth rate. And even then, notwithstanding the fact that demonetisation took place in the third quarter of last year, we have ended the year with 7.1 percent growth. Our normal today is 7-8 percent.

India has carried on a large number of structural reforms in the last few years. And now with the kind of structural reforms which are setting in, the kind of public expenditure and foreign direct investment we are getting in, I expect growth to turn around and improve this year. That’s what all global agencies are indicating. I do believe that the net effect of demonetisation, that is the integration of the informal economy with the formal one, GST likely to set in by July 1 this year, hopefully with a good monsoon being predicted this year, growth revival is again going to take place.

The one important challenge that we have is with regards to private sector investment. We do believe that the global curve is also turning, though turning slowly. Domestic consumption is improving. And hopefully if we are able over the next one year or so, to address the problem of the Indian banking system, growth will again pick up significantly.

PSU Bank Consolidation

How much capacity do have to enable these banks to have more public sector bank mergers. That’s something you can achieve without pushing growth further down.

I think the merger itself will only strengthen Indian banks, it won’t weaken the capacity of the banks to support growth. I don’t think India needs numerically a very larger number of public sector banks because the banking industry has undergone a significant change. Now, we have foreign banks, private sector banks, payment banks and now the nature of the banking industry with technology itself has changed and therefore I have announced that amalgamations and mergers are very much on the cards. The first big one was the State Bank of India with its subsidiaries, that has already taken place and we will be contemplating a few more. Initially, the idea was to allow the health of the banks to improve a little, but there are some bits on which we can still work on.

Assessing Demonetisation

Do you truly believe demonetisation has been a success?

We were conscious of the fact that demonetisation, to the extent that it causes a cash crunch may temporarily, for a quarter or two, impact us adversely. But there were some long-term advantages which were envisaged. The first significant advantage that has taken place is, there is a substantial movement towards digitisation of the economy. The use of cash relatively comes down, the use of other mode of payments increases. The second is, there is a substantial number of assessees who have been added.

In the first three months after demonetisation, 9.2 million new tax assessees have been added. Therefore, I anticipate tax collection to substantially increase.

Thirdly, I think the norm has been established in India, and the message has gone out loud and clear that it is no longer safe to deal with cash.

Signs Of Stress?

What you think of the MPC declining to meet with finance ministry officials before the policy today?

I think the finance ministry represents the Government of India, and the finance ministry representing the country is an accountable institution. Therefore, the government to give its own assessment of the economy to the RBI is a normally thing and therefore it’s done orally or it’s done in writing. It’s immaterial. I think it’s an important input that the economic division of the finance ministry gives to the central bank. Ultimately, it’s within the domain and the authority of the central bank itself to decide the rates and for us to respect their jurisdiction