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The Hindu Notes for 9th October 2018

Independence and accountability

As the RBI’s autonomy is debated, it needs to revisit its exclusive focus on inflation-targeting

  • Far from achieving a desirable ‘monetary-fiscal coordination’ in India today, the Reserve Bank of India (RBI) and the government give the impression that they are not on the same page even as far as an understanding of their roles is concerned. This may be seen in statements by them on websites, Twitter and in the old-fashioned mode of the public lecture given by the Finance Minister and a Deputy Governor of the RBI, respectively. The RBI suggests that its independence is being violated while the government rationalises its intervention in terms of its concern for the economy. How do we make sense of these positions?

    • Defining autonomy

  • Even at the time when the idea of central bank independence began to germinate some two decades ago, this was understood to mean a ‘functional’ independence. That is, the bank would be unconstrained by the government in its functioning, which includes both the instruments it uses and how it uses them. However, its autonomy was not to extend to ‘goal’ independence. What the goals of the central bank should be were to be chosen by the government without reference to the bank. The main issue here was whether the bank should focus on inflation alone or also on the level of employment. Within a decade of this debate, it had been conceded that the focus would be exclusively on the former, and monetary policy came to be identified with ‘inflation targeting’.
  • Two points may be mentioned in this context. First, the discourse was solely among interlocutors from Western democracies, ensuring the issues were those related to their economies. Second, even as the major central banks of the world shifted to inflation targeting, in yet another example of American exceptionalism, the U.S. did not revise the goals of the Federal Reserve. It was to continue focus on maximising employment while keeping prices stable, a sensible recognition of a possible trade-off between these goals. In India where for close to a quarter century political parties of all hues appear to suggest ‘what is good for America is the best for India’, this has been missed. In 2015 the RBI was by law, in line with a “modern monetary policy”, expected to target inflation. It was to remain the banking regulator though.
  • Once we are aware of how central bank independence was first sought to be understood and of the agreement between the RBI and the Government of India in 2015, it is not difficult to separate the grain from the husk in the public spat between the two playing out in the media. The issues of contention happen to be the corrective action to be taken for stressed banks, the prudential norms to be adopted by financial institutions, the easing of liquidity and the sharing of the surplus generated by the RBI. Here, barring the last, all others are in the RBI’s bailiwick so to speak. On the other hand, on the sharing of the surplus, it is understood that the Government of India legally is the owner of the surplus generated by the country’s public institutions. Even under this architecture, though, all care must be taken to ensure that the central bank’s reserves are of a level commensurate with the extent of the financial sector and the potential degree of systemic risk from its malfunctioning, which can vary. So, we can’t go just by formulae here.
  • Apart from the issue of sharing the surplus, the RBI should be left alone by the government to decide on the right course of action. This derives not so much from a notion of central bank independence as it does from the point of view of a credible governance policy. The Government of India would have chosen the Governor, participated in the choice of his deputies and had a say in the appointment of even the independent members of the central board of the RBI. In addition, the board has representatives of the government on it. It should now be left to this body to decide on the precise corrective action for banks with high NPAs, the desirable state of liquidity and the prudential norms to be observed by banks. The RBI is the banking regulator after all, and for the government to attempt to direct it would constitute micro-management.

    • Stability of the economy

  • Stepping away from legal niceties, there is reason to believe that some of the actions being sought to be imposed on the RBI today could jeopardise the stability of the economy. While acting as the lender of last resort can be stabilising, under no circumstances would it be advisable to lower prudential norms in the presence of stressed banks. The government’s concern for the health of the medium and small enterprises is well-founded. After all, they were among the most affected sections following the demonetisation of 2016. If, in the spirit of contriteness as it were, the government wants to reach out to them, the right course would be to provide interest rate subvention, rather than to force the RBI to tweak its lending norms. There is a severe lack of judgment in loan melas promising online sanction in less than an hour. There is the suggestion in this of the political business cycle, a government trying to nudge the economy prior to an election. The resistance of the RBI top brass to this desperate action is understandable.
  • Whatever may be the misfeasance of the government in its recent dealings with the RBI, however, it would yet be acceptable to review its own performance in the sphere in which it has an untrammelled independence, namely monetary policy. Under this arrangement it has control over the interest rate. Over 2013-2018 there has been a 5 percentage point swing in the real interest rate in India, moving from a negative to a positive level, making it among the highest in the world, much higher than that of China. This is clearly the consequence of an exclusive policy focus on inflation from even before inflation targeting was formally adopted by Parliament in India. It may well have contributed to slow industrial and export growth, due to a real appreciation of the rupee, and a rise in NPAs even after their existence had been recognised. If this is the monetary policy that central bank independence brings with it, we might just be a little sceptical of the value of the independence itself.

    • Enabling job creation

  • There is a certain populism inherent in privileging inflation control to justify extraordinarily high interest rates. While it would be bad economics to tolerate high inflation, the absence of inflation by itself only benefits those in employment, it does not assure jobs to the unemployed. Thus a monetary policy that ignores the impact of its actions on unemployment is not credible. Interestingly, the government and the RBI have always been on the same page as far as inflation targeting is concerned. The populist message that inflation erodes the income of the poor conceals the possibility that in the implementation such a policy could hold back job creation by restricting investment. The rising current account deficit, the slow growth of employment and the disappointing performance of manufacturing, the sector most closely affected by high interest rates, should prompt us to review how monetary policy is conducted in India. In the past, the RBI had a ‘multiple indicators approach’ which paid attention to inflation, growth and the current account. This may not have borne the precision conveyed by ‘inflation targeting’ but it did answer to Keynes’s dictum, “It is better to be vaguely right than to be precisely wrong.”

    • What next after #MeToo?

    It is important to use this moment to craft a new, more effective framework for due process

  • Sometimes to upend entrenched power structures, a revolution is required. Naming and shaming powerful men in the #MeToo campaign is in many ways a revolutionary act. The truth about most was known, spoken in whispers, but not to their face. But now that omerta has been broken by some intrepid women, there’s a palpable sense of power and possibility.

    • Moment of change

  • Revolutions are by definition anarchic, as they are aimed against those who make and enforce the rules. So it has been with #MeToo. Men are named, sometimes anonymously, and the naming itself requires punitive action to be taken against them. There isn’t really any room for discussion on context or degree of culpability. Some have raised questions about due process, and the response has been, somewhat reasonably, that due process has failed. And it is true, arguing for due process when due process has failed feels a bit like batting for status quo. So let it be said, #MeToo despite its limitations is unreservedly a good development.
  • However, the question is, what next? The #MeToo movement is more than just outing powerful men, it is about shifting the balance of power between men and women, transferring the punitive aspects — shame, denial of work opportunities — from the victim to the perpetrator. It is about ending impunity embedded in our social construct by shaping new social mores. This is and has to be a collective effort, and it is important for the #MeToo movement to have these discussions. There are two broad questions which require discussion. First, what should constitute sexual harassment? Second, when and how should the state and other institutional mechanisms come into play?
  • As personal accounts have tumbled out on social media, it has become obvious that the definition of “sexual harassment” is very fluid. In support, many have taken the line that sexual harassment is whatever makes the woman uncomfortable, and it’s for her to decide. This is a completely justifiable response when it comes to personal interactions, and when the response is personal by, say, ticking someone off. However, when we bring collective pressure to bear against anyone for punitive effect, we have a responsibility to collectively define behaviour which will invite punitive action. Moreover, while public opinion has reduced culpability to a binary concept, it is important to define graduated norms of unacceptable behaviour, including associated levels of criminalisation and punitive consequences. Along with the manner of establishing culpability, this is the sum and substance of due process.
  • There is no ambiguity that any form of coercion is wrong and should engender exemplary punitive consequences. But what about social awkwardness? What about behavioural conflicts arising out of differential expectations in societies in transition? Staring, telling risqué jokes, crude propositioning can be as much about social awkwardness as abuse of power. It’s not that such behaviour is not inappropriate or wrong, but we should pause and think about the consequences of bringing in state or institutional power to penalise transitional behaviours in personal interactions.
  • India as a society is transitioning rapidly, and people with widely different understandings of acceptable social mores coexist without having had time to acclimatise. In a study on sexual harassment by the National Students’ Union of India (NSUI) in Delhi University, we found that one in four girls reported sexual harassment. In this, by far most instances related to staring, crude comments, etc. One conversation with two very articulate and urbane female students went quickly from young men staring and making women uncomfortable to an anti-reservation tirade for allowing university spaces to be allegedly overtaken by crude lower-caste rural men. As a society we can frame this situation as gender/caste/class antagonism or of managing inevitable conflicts in transitional societies. The institutional response in the former conception will be regulatory and punitive, the latter will be more about defining mores of acceptable behaviour and education.

    • Concerns about state power

  • There are legitimate concerns with bringing in state power to penalise transitional behaviours. First, the response is often too heavy-handed, and second, it makes social reform and gender relations too antagonistic. Section 354A of the Indian Penal Code defines sexual harassment as “physical contact, advances of unwelcome and explicit sexual overtures” but also “making sexually coloured remarks”. It is true that conviction rates under legal processes are extremely low but surely even conceptually, we don’t want to send people to jail for telling crude jokes.
  • Institutionally too, it is important to expand the discourse to talk about the measures required to create more gender-neutral spaces while retaining room for graduated levels of punishment. Censure, delayed or reduced work opportunities, suspension and firing are all forms of regulating inappropriate behaviour and we should be wary of a reductive public discourse where the institutional response is a binary of firing/not firing, with the latter interpreted as sanction and/or encouragement.
  • Impunity exists in a social construct. Till now, due process did not work because the social context was skewed in favour of marauding men. However, the long battle waged by generations of strong women before and the courage of many women today together is forcing the social context to change. It is important to use this moment to institutionalise and craft a new, more effective due process. That should be #MeToo’s lasting legacy.
  • Ruchi Gupta is an AICC joint secretary in charge of the NSUI. Views are personal

    • 2018 Assembly polls: the semi-finals for 2019?

    There is enough ferment in these elections to craft a heady new brew in 2019

  • The Assembly elections in Chhattisgarh, Madhya Pradesh, Rajasthan, Mizoram and Telangana certainly are the semi-finals for the 2019 general election. In the first three States, the Congress is in a direct contest with the BJP. Every Assembly seat that the Congress wins will help it wrest more Lok Sabha seats from the BJP. In 2014, the BJP won 10 of the 11 Lok Sabha seats in Chhattisgarh, all 25 seats in Rajasthan, and 27 of the 29 seats in Madhya Pradesh. The BJP cannot better this performance. In Lok Sabha byelections after 2014, the Congress has wrested some seats from the BJP. The Congress is set to maintain that momentum in the Assembly polls. That will transform the 2019 electoral contest.

    • A test for anti-incumbency

  • This election will also test whether anti-incumbency can be harnessed effectively. The BJP government in Rajasthan has been a disaster, so the Congress should be able to win there. After 15 years of BJP rule, the rot is clearly visible in Chhattisgarh, seen in the PDS scam. The BJP has ruled for many years in Madhya Pradesh and the Vyapam scam is alive in people’s memory. In these three States, the cumulative number of registered unemployed youth is very high. Anti-incumbency can work in favour of the Congress alliance in Telangana, but against it in Mizoram. Overall, if voters focus on track records, that augurs well for the Congress in 2019 as the Modi government has failed spectacularly in delivering on its tall promises.
  • The key question these Assembly elections will answer is this: will local governance factors overcome national emotive issues? If the Congress can get voters to decide based on issues and candidates and their track records, that provides a template for the Lok Sabha election. That will counter Prime Minister Narendra Modi’s attempt to make it a presidential-style contest. Nationally, the Sangh Parivar is getting set to unleash the Ayodhya issue. We will see if voters in these States get swayed by yet another cynical BJP ploy to polarise the electorate and divert attention from its all-round governance failures.

    • The arithmetic of alliances

  • These elections will also teach us lessons about the arithmetic of local alliances. In Telangana, the Congress is in alliance with the Telugu Desam Party and with the Kodandaram-led Telangana Jana Samithi that led the Telangana movement before it was hijacked by K. Chandrasekhar Rao (KCR) and turned into a family firm. There is also a significant number of Andhra Pradesh-origin voters in Telangana. The people have also not forgotten that it was the Congress that helped make Telangana a reality. Thus, the alliance is set to demonstrate that KCR miscalculated by going for early polls, and can then improve its performance in 2019.
  • The alliance with Mayawati did not happen. By tying up with Ajit Jogi in Chhattisgarh, Ms. Mayawati risks dividing the anti-BJP voter base. But this time she may find that her voters will not stick with her if doing so only benefits the BJP. Another electoral wipeout for the BSP will weaken Ms. Mayawati’s bargaining power for 2019 and cause her core Jatav Dalit supporters to gravitate towards emerging alternatives like the Bhim Army.

    • Caste arithmetic

  • This election also portends a shake-up in the caste arithmetic. Various upper caste groups that were hitherto staunch BJP supporters are upset with it because of its doublespeak on the issue of the Scheduled Castes and the Scheduled Tribes (Prevention of Atrocities) Act. Their disgust with the BJP and their lack of trust in it is causing them to embrace the Congress.
  • Thus, there is enough ferment in these Assembly elections to craft a heady new brew in 2019.

    • The Lok Sabha verdict is likely to be not one verdict but 29 distinct voter assertions

  • Why and how does one assert that the 2018 Assembly elections are not necessarily the semi-finals? Three arguments can be marshalled in support of this contention. First, the Assembly polls in Madhya Pradesh, Chhattisgarh, Rajasthan, Telangana and Mizoram are unique electoral contests that do not represent the diversity of political competition found in the rest of the country. In the three north Indian States, it is a direct contest between the Congress and the BJP. In Chhattisgarh and Madhya Pradesh, there could possibly be a distant third factor. In Mizoram, the competition is essentially between the Congress and a State-based party. The danger of calling this electoral round a formal semi-final is that one is tempted to extrapolate the political trends witnessed in these polls to the national election.

    • Every State is unique

  • Given the fact that the Lok Sabha verdict is likely to be not one verdict but 29 distinct voter assertions, each will be propelled by a unique constellation of factors that will define and decide the nature and structure of the electoral competition in that State. The danger of arriving at overarching generalisations based on these four verdicts is that it would do injustice to the complex nuances that explain a national election result. This week, we saw the Congress-JD(S) alliance wrest the initiative from the BJP in the Karnataka bypolls. Yet, this is not necessarily any indicator of what may happen in the five Assembly polls or an indicator of the wider national implications for the Grand Alliance of non-BJP parties.
  • Second, over the last two decades, we have seen that a few months is an excruciatingly long time in politics; you can see many unexpected twists in that time. Issues which have been on the backburner for long can be pushed to the forefront or parties can place them at the top of their agenda. We are likely to witness this trend this time around too, with the BJP deciding to push its development agenda to the background and play up the Ram Mandir issue. This distinction between factors that influence an Assembly verdict and a national vote has been seen in the past too. A classic example was in 2003-04, when the BJP came up with a remarkable electoral performance in the December 2003 Assembly polls but bit the dust in the 2004 Lok Sabha election. In Karnataka, the Assembly verdicts have never accurately predicted a Lok Sabha verdict in the State.

    • A different ball game

  • Finally, we assume that if an election is called a semi-final, it is a trendsetter for the grand finale. Sports enthusiasts would know that this can be very misleading. Teams which struggle to win a semi-final can win handsomely in the final and vice versa. One can be lulled into complacency by a semi-final verdict and be totally off the mark while assuming that similar trends will play out in the final. Each game has its context. When characterising a contest as a semi-final, we associate it with certain trends and assume that the same will play out in the final. The history of both sports and politics has proved that this is not necessarily true — one could well be framing a wrong set of indicators emerging from a semi-final to project the trends of a final. Let’s remember that a final is more often than not a different ball game both in terms of the context as well as the content of the contest.

    • The real question is, can we project the results beyond the five States going to polls?

  • Semi-final is a lazy and misleading metaphor for how the Assembly elections are likely to foreshadow, and in turn influence, the Lok Sabha elections. A semi-final filters the final contestants. It gives little idea of who is going to win eventually. It does not shape the final outcome. If we must use a sporting metaphor, there is an element here of a warm-up match where the finalists play off against each other. Using a film industry metaphor we could call it the trailer. Or it could be compared to a qualifying round in the F1 races, where your performance in the earlier round gives you a head start in the final. We may call this direct or indirect impact on the final outcome the tailwind effect. Let us discuss both these one by one.

    • A careful reading of outcome

  • These Assembly polls could be a trailer for the eventual movie, provided we do a careful reading of the final outcome of these elections, away from the shrill headlines and political rhetoric that dominate TV screens on the day of counting. There is, of course, a straightforward connect: the BJP won 63 of the 83 seats in these five States in 2014. So, it must win the three Hindi heartland States comfortably to retain any hope of repeating that performance. Past record suggests that a defeat in any of these States would certainly mean major losses in the Lok Sabha elections.
  • The real question is, can we project the results beyond these five States? Telangana and Mizoram are outliers here. Their results do not reflect even their neighbouring States, let alone the entire country. We should focus on Rajasthan, Madhya Pradesh and Chhattisgarh. These three States form a large, contiguous region that went along with the rest of the Hindi heartland in 2014. This region gave the BJP and its allies 203 out of 225 Lok Sabha seats. This is where the BJP’s fate will be determined in 2019. The more likely scenario of the BJP facing a rout in Rajasthan and suffering a significant drop in votes in the other two States would show that the party is vulnerable in its quest for return to national power. A BJP defeat in any two of these three States would suggest a negative mood in the Hindi heartland States and a steep decline from its 2014 seats tally.
  • Then there is the ‘tailwind’ effect, since these State polls will have real-life consequences for the national polls. If the BJP wins Rajasthan, Madhya Pradesh and Chhattisgarh, the Opposition campaign will face a strong headwind. Conversely, an electoral reversal for the BJP in the Hindi heartland States will dampen the morale of the BJP election machine. This may also facilitate the process of Opposition unity. If the Opposition controls one or two big States, this would also mean more election funds to the non-BJP camp.

    • A balancing act

  • A setback for the BJP would encourage big business to hedge their bets and give at least a small share of their political donations to the Opposition parties. Above all, if the results indicate a shift away from the BJP and the possibility of a non-BJP government at the Centre, it would trigger a badly needed balancing act in the media where bending over backwards has become the norm. At least some TV anchors will stop behaving like BJP spokespersons, some newspapers will stop carrying the government’s spin as news, and views critical of the regime will find their way to the editorial pages. That will still not make for a level playing ground, given the massive advantage of money, media and machine that the BJP enjoys today, but it might make the 2019 contest less unfair.