P Chidambaram, the Finance Minister in the United Progressive Alliance (UPA) government, pressed the Reserve Bank of India to paint a rosier picture of the economy, with inflated growth and inflation estimates, according to former RBI Governor D Subbarao's latest book, 'Just A Mercenary?: Notes from My Life and Career'. The chapter 'Reserve Bank as the Government's Cheerleader? According to Subbarao, governments are insensitive to the necessity for the RBI.

"If a government requests that estimates be raised in order to bolster public sentiment, and the RBI complies, it is incorrect. "The RBI must maintain its credibility because its monetary policy stance is based on growth and inflation projections," he told Moneycontrol in an exclusive interview on April 30.

The friction between the central bank and governments is ingrained due to the RBI's mandate. The Reserve Bank of India is supposed to ensure financial and price stability by taking a long-term economic view and making difficult decisions. On the other hand, elected administrations cannot handle this since they operate on a short-term cycle dictated by election schedules, he said.

"When central banks and institutions are less mature in emerging economies like India, we must be more cautious about such differences emerging in the open, as they can destabilize markets. Differences exist in all countries; how they are addressed must differ. "Emerging countries such as India are especially vulnerable," he noted.

The RBI is not limited by a lack of autonomy. The concern is how much the government respects the RBI's autonomy and how the RBI exercises it, he said.

Forex Reserves

The reduction in India's foreign reserves is not reason for concern, according to Subbarao. They are currently valued at roughly $640 billion, and the RBI should limit its intervention to reduce volatility and increase credibility with international investors in order to make the rupee more acceptable, he added.

"The short-term fall in foreign reserves to $640 billion is not cause for concern. We should be concerned with the rate of decrease rather than the magnitude of the decline. "If foreign exchange reserves fall sharply and rapidly, it will be cause for concern," he warned.

As of April 19, India's foreign exchange reserves were $640.33 billion, a six-week low, according to RBI figures.  The RBI's declared policy is to control exchange rate volatility rather than to set a specific rate.

"However, every time the RBI intervenes, the market perceives that the RBI is targeting a single exchange. If the RBI is perceived to be manipulating the exchange rate, international investors will be hesitant to participate into contracts. If the exchange rate is not reliable, investors would be concerned, and we must exercise caution," he warned.

At the RBI's 90th anniversary celebration on April 1, Prime Minister Narendra Modi urged for the rupee to be made more acceptable. "For that to happen, RBI has to follow a less interventionist approach," Subbarao added.

Subbarao credited the RBI and the government with successfully navigating the economy through the geopolitical problems of the last five years, claiming that the epidemic destabilised financial models around the world due to lengthy supply interruptions and the Russia-Ukraine conflict.

"There has been no shortage of obstacles for the RBI. The RBI has handled them effectively. "The Covid-19 challenge was daunting for both the government and the RBI because it appeared to be an ongoing crisis," he said.

FRBM Act

Subbarao praised the administration for making Union budgeting transparent during the previous four years by eliminating off-budget borrowing, noting that under current Finance Minister Nirmala Sitharaman, all expenditure has been brought on the books.

"Over the last three or four years, the central government has been much more transparent. However, many state governments borrow but do not report it in their budgets. They can get around the FRBM Act obligation by borrowing from public sector firms, even if the responsibility of repayment rests on the exchequer," he stated.

The Fiscal Responsibility and Budget Management (FRBM) Act limits states' borrowing to 3 percent of their Gross State Domestic Product (GSDP).  "FRBM must be made stringent, mandating governments to take into account any debt for which the government is responsible," he told reporters.

The FRBM review group, led by NK Singh, proposed that in the event of a national disaster or other extraordinary circumstances, the government be permitted to stray from the aim.

"Any conditions for relaxation of the FRBM Act, however, should be extremely stringent and extraordinary. The FRBM committee believes that an escape provision is both advisable and required. But the criteria for relaxation must be very high and unusual," he remarked.

Cost of Credit

Subbarao stated, "Cost of credit matters, but access to credit matters more." The previous RBI Governor stated that while India has access to finance, the goal is far greater.

"Financial inclusion has expanded significantly over the previous decade under the RBI, owing primarily to digital technology, low-cost Internet, and mobile phone access. Artificial intelligence enables lenders to analyze a professional's creditworthiness. "Positional data also provides clues," he said.

Freebies

With elections underway and parties pledging a variety of freebies in their manifestos, Subbarao stated that it is critical to assist the most disadvantaged, but there must be restraint. After the elections, the administration should issue a white paper to reach an agreement on restricting giveaways, he said.

"Freebies are costly to the economy. The money spent on freebies may be put on education and healthcare infrastructure, which is more sustainable. Thus, there must be political agreement on restricting freebies. "Freebies may also have an impact on the RBI's inflation estimates," the former RBI governor said.

Inflation

According to Subbarao, the formation of the Monetary Policy Committee is a positive thing because the government's power to apply pressure on the RBI is limited.

As the inflation targeting framework is reviewed every five years, Subbarao believes there will be a rationale for the RBI to boost India's aim from 4 percent if advanced economies raise their own targets.

"One of the levers for setting the inflation target is to examine the inflation targets of mature economies. In the United Kingdom, Europe, and the United States, inflation remains high. If advanced economies converge on a 3% inflation objective, the RBI may reconsider its inflation target. However, a mid-course change to the inflation objective has the potential to destabilize markets," he stated.

A low amount of inflation promotes growth. According to research, 4 percent inflation promotes growth, but anything above 6 percent is detrimental to growth, he said.

The World's third Largest Economy

Regarding India's goal of becoming the world's third-largest economy at $5 trillion, he stated that a high gross domestic product (GDP) is due to a huge population, which is a factor of production, and that India will stay impoverished with an estimated per capita of $3,300.

“Based on current trends, we will become the third-largest economy within the next 3-4 years. It's a reason to cheer, not to celebrate. The huge GDP is the result of a large population, and people are a factor of production. However, this still leaves us as a poor country on average," Subbarao explained. "We must increase growth while ensuring that the advantages are broadly shared for prosperity. Not only does average per capita income matter when evaluating poverty, but so does the distribution,” he said.