What should RBI policymakers be wary of in this financial year

Recently, I read a paper entitled Overcoming the Tragedy of Super Wicked Problems: Preventing Our Future Sells to Improve Global Climate Change (May 2012), which provided a framework for tackling climate change. This paper is about how to get public support and participation in efforts to tackle carbon emissions and how to sustain it. It was published in Ritter and Webber’s paper on the Dilemma in General Theory of Planning, 1973. Bad problems defy neat solutions and linear approaches to technology. The paper acknowledged that route-based processes occur by accident, and that they can, instead of solving, exacerbate super-evil problems.

Two classic papers in this paper, Godgave Physics The Easy Problems, were published in 2000 and referenced by Paul David, Cleo and Classic and Economics of QWERTY in 1985. Paul David’s paper on Qwerty Economics refers to the influence of ‘software’ on hardware. A past investment in the skills required to type using the QWERTY keyboard has created scale economies for it, and while not optimizing the ability to use both hands for typing, it has become a global standard. The manual-typewriter does not separate the widely used letters of the alphabet to prevent the keys from jamming. However, it survived.

Separately, the authors of the first paper mentioned here say that the big questions in the social sciences have abrupt and complex causes, and that the search for ‘laws’ and immutable causal relationships is frustrating. It calls for constructive humility in the current context of our attraction to reduction logic and false hypotheses. Advice is often timely, depending on the path of organizational autonomy, the reason for freedom, and the often decisive statements that businesses make in influencing both. This advice is similar to the questions asked by financial investors and policy makers. Uncontrollable.

The two recent crises in financial markets have been the policy policies of central banks in developed countries for a decade (or three, depending on what you see). First came Greencil. The supply-chain finance company broke down. It brought back memories of 2008. Then, last week, a family business called Archigos was forced into debt and the derivatives it collected. What is more interesting than its failure is the evaporation of the co-operative arrangements agreed by the banks on Friday morning. It is the confusion of prisoners at work. So much for Homo Economics.

We have just entered the new financial year. The Reserve Bank of India (RBI) will hold its first monetary policy panel meeting this week. In the spirit of the above discussion, it is pertinent to recall that Willem Butter wrote in The State of the Art Academic Monetary Economics (March 6, 2009) on ‘The Unfortunate Uselessness’. He was one of the ‘founding’ members of the Bank of England’s Monetary Policy Committee after the UK Treasury issued an inflation directive. His observations will come in handy as RBI policy makers look forward to the new financial year, given the tremendous monetary and economic incentives going into economic policy in developed countries.

Butter wrote that the traditional economics training of academics and other professional economists at the Bank of England during the 2008 crisis proved to be handicapped. They had to deal with a wide range of market and funding mass conditions from targeting inflation in orderly economic conditions. Such requirements may not arise in India this year. But, with the spillover effects on the Indian economy, global financial markets are likely to face similar situations. In such a scenario, would the inflation-target framework of India be an uncomfortable shackle for policy makers? We must not forget that the inflation target is a product of neo-classical economics that ignores the path-dependence of economic outcomes.

Recent Paper, Inflation Target: Too Much About Nothing? A review of the Evidence (March 2021) by the International Monetary Fund and beyond will show that India’s inflation rate has been declining since before the introduction of the Flexible Inflation Target (FIT). Second, the same thing happened in the case of other countries, not really the FIT target. Third, they show that if food and related components of the Indian Consumer Price Index (CPI) are given less weight, the index is likely to increase inflation as food prices rise, resulting in more regulated monetary policy than necessary. Fourth, it is one of the reasons why India’s performance has been low in recent years.

India has recently confirmed that it will stick to its FIT framework for another five years with similar parameters. The good news is that the RBI has been blessed with leadership that outlines the framework very simply to effectively manage the risks of volatility in the year 2020.

V. Anantha Nageshwaran is a member of the Economic Advisory Council to the Prime Minister. These are the personal views of the author.

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