With the Indian economy going through tough times and an ongoing debate over the Reserve Bank of India’s tight money policy vis-à-vis growth, Prime Minister Manmohan Singh on Saturday favoured revisiting the possibilities and limitations of the monetary policy in a globalised and fiscally constrained economy. He also dismissed the possibility of a throwback to 1991 balance of payments crisis situation and reversing the path of globalisation of the economy.
The Prime Minister called for a “fresh thinking” on macro-economic policy-making, its targets and instruments. “We should revisit some of those areas,-the possibilities and limitations of monetary policy in a globalised economy, in a fiscally constrained economy,” Dr Singh said.
He also said that macro-economic policy-making, targets and instruments was another area “where I feel fresh thinking is called for”.
In 1991, Dr Singh said, the country had only foreign exchange reserves for 15 days. “Now we have reserves of six to seven months. So there is no comparison. And no question of going back to the 1991 crisis.”
“At that time foreign exchange in India was a fixed rate. Now it is linked to the market. We only correct the volatility of the rupee,” he told agencies.
He was speaking after releasing the fourth volume of RBI History — Looking Back and Looking Ahead at his residence.
The PM expressed hope that future governors, including governor-designate Raghuram Rajan, would attempt to revisit some of these areas. The remarks assume significance in the context of the current debate over the RBI’s hawkish policy stance on checking inflation vis-à-vis the government’s priority on promoting growth.
He said a degree of national consensus was required if the government has to carry out social and economic change in a large and diverse country like India.
Dr Singh said the RBI had served the country with great distinction but “the best is yet to come”.
“The history of RBI is the history of growth of India since Independence and it has done the country proud by playing a role in shaping the monetary and credit policies and influencing the supply of credit to rural areas,” he said.
In his speech, outgoing RBI governor D. Subbarao characterised as “inaccurate and unfair” the contention that the Central bank was “obsessed with inflation, oblivious to growth concerns”. He termed as oversimplification that governments are for growth and Central banks are for price stability.
He said it was another oversimplification to assert that there is a tension between growth and inflation and that one has to play a trade-off between the two in policy-making. Mr Subbarao demits office on September 4.