Time To Dump Rajan And Mistry Reports? - An Awkward Corner

Time To Dump Rajan And Mistry Reports?

Niranjan Rajadhyaksha - Thursday, March 26, 2009 12:33 PM

I recently had lunch with a few British civil servants and asked them whether they have given up on the possibility that the Reserve Bank of India (RBI) will further open up the Indian banking sector this April, as promised in its famous road map.

They claimed to be mildly optimistic that financial sector reform is not a dead cause in India.

TCA Srinivasa Raghavan makes a sharp and relevant point in a recent article in the Hindu Businessline.

"And, if I may respectfully suggest, this knocks the Mistry Committee Report and, to a lesser extent, the Raghuram Rajan Committee report, out of the reckoning as blueprints for financial sector reform in India. Both were so heavily influenced by the US-UK model that their credibility is now seriously open to question."

He was commenting on the recent report --- which TCA describes as an earthquake --- submitted by Adair Turner, head of Britian's Financial Services Authority, to Gordon Brown.

The point is that the rethinking at the heart of the global financial industry not only makes the Mistry and Rajan reports outdated but is also further proof that the attacks on former RBI governor YV Reddy for his caution on speculative capital inflows and rapidly deregulating the financial sector were blind --- and perhaps motivated.

"In the end, we are left with several questions, only some of which can be asked openly. One of them is addressed to Indian economists: Why is it that if India has an approach to something, Indian economists wait for it to be validated by the West before they accept it? Indeed, why do they attack the Indians who advocate that view before such validation is bestowed by the West? I genuinely believe that the Finance Ministry, which funded the Mistry report, and the Planning Commission, which funded the Raghuram Rajan report, have some serious explaining to do. As indeed do the economists who toed their line and kept up LeT like attacks on the RBI."

Amen.

Also see these previous posts at this blog.

1. The Raghuram Rajan Fan Club.

2. Y.V. Reddy Has The Last Laugh.

 

 

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6 Comment

From chandra

March 27, 2009 9:55 AM
Good post, but as you know our economy is not like US even five years ago and now. Mr Reddy could done it better with good understanding. Of course many now says Mr Reddy did right thing but these folks fail to understand what actually need for reshaping the Indian economy towards double digit or more growth rate and better social development. In fact TC A understands this but for the sack of tricky journalist or something he is now sidelined.

From mk

March 28, 2009 4:43 PM
This seems to be too simplistic... a case of jumping to conclusions. And by the way, you haven't answered the question, "Is there a contradiction here?" abt your previous post on Raghuram Rajan. Aren't we being too quick to dump the man who, as your point out, also asked the "Has Financial Development Made The World Riskier?" as early as 2005? Would it not be more appropriate to rebut specific suggestions by these committees that now look foolish, rather than disregard them because they proposed financial sector liberalization.

From Sumita

March 30, 2009 4:30 PM
@mk, just a clarification, it's not dumping the men behind the reports, its reviewing the ideas that were being propogated, eg. inflation targeting, is one if you want specifics. For another piece on how Reddy was vindicated on his tight controls, http://www.nytimes.com/2008/12/20/business/20nocera.html?pagewanted=1&_r=1&em By the way, the 'attack' on the Americans and their policy prescriptions of 'one size fits all' is all across the world now, read the comments at the end of this piece by Krugman to appreciate the differences between Europe and America and why the former does not look kindly to US-made ideas.. http://economistsview.typepad.com/economistsview/2009/03/paul-krugman-america-the-tarnished.html

From Vidya Mahambare

March 31, 2009 3:45 PM
Shouldn’t we recognize that the entire blame for the crisis cannot be placed on the free markets alone? Excessively loose monetary policy in the US did help create the problem of financial excess, but does that mean the theory of inflation targeting itself is wrong? The narrower focus on specific inflation might not be the right thing to do when asset price inflation is ignored. Mr. Reddy essentially had factored asset price boom into his policy. Also, inflation targeting certainly does not mean there is no consideration for growth. In fact, had the Fed followed the plain Taylor rule between 2002 and 2006, the interest rates would have been much higher and we might have avoided the crisis. In that case, we wouldn’t have had this backlash against the existing policy models. Other government policies also played a part – mortgage securitization worked because the US govt practically absorbed the default risk via Fannie and Freddie. We can't clap with one hand alone.

From mk

April 6, 2009 10:56 AM
http://www.iimahd.ernet.in/~jrvarma/blog/index.cgi/Y2009/efficient-market-hypothesis.discuss

From Sumita

April 8, 2009 11:34 AM
Actually, I am really not a great believer in the Taylor rule working for many reasons, and I would have sent in a bunch of research papers documenting the issues on theoretical and operational grounds, but I am increasingly beginning to realise that economics is all about beliefs.. so when I read that link that mk had sent in, I found myself nodding everytime Prof Varma’s arguments were countered. If one believes in the EMH, I think its difficult to convince them otherwise. So, mk, if you are going with Prof. Varma, I guess we will have to agree to disagree on this :) Vidya, you are right that the entire blame cannot lie on free markets alone, government are to blame too. So its not a free market vs government debate at all, we have to see the limitations of both. The reason for both markets and governments to fail is, I believe, that they are both made up of human beings, and humans are fallible - both individually and in aggregate can work most inefficiently. The sooner we realise that, the less dogmatic theory can become – economics has to blend in psychology, geography, sociology etc, and stop its narrow focus on equations that assume these other social sciences have nothing to do with us, or worse, that all the other interlinkages have been taken care of. The need to integrate all parts of our society, environment and economy while making policy recommendations is best illustrated by Krugman’s latest piece that quotes the NBER paper by Phillipon and Reshef that shows a link between financial deregulation and rising inequality in the US.. http://krugman.blogs.nytimes.com/2009/04/07/the-financial-factor/ This does not mean a blanket prescription of ‘don’t deregulate’ but instead it serves as a useful reminder of the tradeoffs that do exist, that we generally tend to ignore. Now you can trash me completely :)

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