A theory of everything

The theme of Dr Acharya’s book is the role of the state and the markets with a sobering intervention of independent authorities
There has been much visibility for former Reserve Bank of India (RBI) deputy governor Viral Acharya and his book. Now that the attention is ebbing, it is time to move away from the euphoria of looking at a book by someone who rebelled against the government in a famous speech (which sparred with then secretary, department of economic affairs Subhash Garg) and resigned a few months later, before completing his term. This book hit the markets on the same day as the one by Urjit Patel, who was RBI governor at that time. Dr Patel was specifically acknowledged for inspiring Dr Acharya to choose the topic of the speech. It is possible to examine the book by picking up that particular speech and then build the “Theory of everything” as presented by Dr Acharya.

Speeches by RBI functionaries go through multiple drafts, careful editing and you will find few senior central bank functionaries delivering an extempore speech. Deputy governor K C Chakrabarty was known for deviating from his written speeches, but the written speech was what remained on record for posterity. This is because every speech from the RBI is scrutinised by a range of players for signals of forward-looking market-moving actions. All “controversial” speeches are vetted, planned and have an intent. Most of Dr Acharya's speeches are analytical and academic in nature. Against this background, the A D Shroff Memorial Lecture defending the RBI’s autonomy was particularly provocative and possibly meant to be so. 

 
Compare this to a deeply analytical paper on striking a balance and the crowding-out effect of government financing in the same section and you will spot the tonal difference.

The theme of Dr Acharya’s book is the role of the state and the markets with a sobering intervention of independent authorities. There is a broad sense of the “given” in the arguments. There is conviction when he talks about financial sector regulation — the tone and prescriptions are clear and specific — a well-defined domain of the central bank. When it is the interplay between fiscal and monetary interventions, the limitations of a monetary authority against a dominant fiscal authority show up. This is the limitation of a collection of speeches. They are written within the framework of an organisation and the  ex-ante  acceptance of the position. You are pushing the boundaries of the framework from within. 

Quest for Restoring Financial Stability in India 

Author: Viral V Acharya

 
Publisher: Sage Publications Private Limited

Pages: 330

Price: Rs 695

If Dr Acharya were to reframe this argument as an academic, he may have been more unshackled and used stronger theoretical arguments than the “wrath of the markets” to make a case for an independent central bank. Paul Tucker has framed this argument convincingly in his book  Unelected Power. 

When Dr Acharya is making an argument for central bank autonomy, he is framing it as a monetary-fiscal standoff. A more rounded argument and the complexity of this dilemma is provided by Y V Reddy in his book Advice and Dissent  in which Dr Reddy recognises the RBI’s role as a full-service central bank. This involves the complexity of working as a check on the government as a monetary authority, a market regulator and as government’s partner on developmental functions.

A significant part of the book focusses on the banking sector, which needs a clean-up. Both Dr Patel and 
Dr Acharya argue for a reduced role of the state as a dominant player in the sector and bat for markets on the assumption that the sector will be competitive and only needs a strong regulatory architecture. 
Dr Patel made this argument more convincingly. 

Dr Acharya has a similar argument, but it is weakened when we come to the section on inefficient transmission of monetary policy. We get the sense that bankers do not pick up RBI’s monetary policy signalling so they need a regulatory framework of cajoling — through benchmarks on interest rate setting. If banks were operating in a free market, competition would drive interest rates down. So apart from cribbing about the state’s dominant role in banking, has the RBI done enough to promote more private banks aggressively — a tool it has in its own hands? The answer for this appears only during Raghuram Rajan’s tenure when multiple and multiple types of bank licences were handed out. Newer and more private sector banks as a solution is something neither Dr Acharya nor Dr Patel have considered.

Of course, there are some cribs on what should not have been in the book. Why is it important that every speech or written word has to be collected in a book? What are the minutes of the monetary policy doing here, or the speech delivered to the Ficci Ladies Organisation (FLO)? The FLO speech is not only a dumbed-down speech, it also is an indication of the gender stereotype that Dr Acharya might harbour — that speeches addressed to women have to be “simple” and almost condescending. That is, however, a minor crib for an otherwise fascinating book.
mssriram@pm.me 

The reviewer is a faculty member and Chairperson of the Centre for Public Policy, Indian Institute of Management, Bangalore 



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