ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles by C RangarajanSubscribe to C Rangarajan

Evolving Contours of Monetary Policy

Monetary policy has emerged as an important tool of economic policy both in developed and developing economies. The monetary and financial system is far more complex today than it has been in the past. Financial intermediation has reached a high level of sophistication, which has itself become a source of concern. The impact of monetary policy action can be transmitted through a variety of channels, some of which though recognised in the past, have become more important. While the traditional issues such as the objectives of monetary policy and the possible trade-off among them remain relevant, they need to be related to the far-reaching changes in the institutional environment at home and abroad. The changing objectives of monetary policy, newly evolving instruments of monetary control and the transmission mechanism and issues related to autonomy in the pursuit of monetary policy are examined.

Some Issues in External Sector Management

The Indian external sector has undergone radical changes post 1992. Against this background, an attempt is made to look at the role of the exchange rate, level of current account deficit, adequacy of foreign exchange reserves and capital flows, and capital account convertibility. The balance of payments in India has been managed well so far. There is a need to increase export competitiveness, which requires among other things an efficient, well-knit infrastructure. To prevent a rise in the real effective exchange rate, we should keep domestic prices stable. The surpluses in the services sector will also need nurturing.

Underlying Drivers of India’s Potential Growth

Global growth is expected to be tepid in the medium term and India will have to depend on domestic growth drivers. In order to better understand the future, a new methodological framework is proposed to estimate potential growth in India with a focus on capacity output till 2029–30. The domestic savings rate was identified as the most potent growth-augmenting driver.

RBI’s Interest Rate Policy and Durable Liquidity Question

The Reserve Bank of India should take into consideration longer term liquidity management for smooth monetary transmission. It must clearly define “durable liquidity” in the form of some quantitative variable and set its desired path for one year or so. This will anchor expectations on future interest rate and liquidity premium, and certainly improve the link between the interest rates in various terms to maturity. Moreover, the desired target for durable liquidity can also serve to improve overall monetary policy effectiveness.

Counting the Poor

Since the submission of the report of the 2012 expert group on poverty measurement, there have been a few comments on it. The purpose of this note is to clarify some of the issues raised by researchers and others on this report. The clarifi cations discussed here are (1) what is new in the approach defining the poverty line; (2) the use of calories; (3) multidimensional poverty; (4) high urban poverty in many states; (5) NAS-NSS consumption differences; (6) poverty measures in other countries; (7) public expenditure and poverty; and (8) poverty ratio eligibility for access to programmes. As most of the researchers have commented on multidimensional poverty, this note also elaborates on the reasons for not considering this measure in the report.

Developments in the Workforce between 2009-10 and 2011-12

After a disappointing performance between 2004-05 and 2009-10, the Indian labour market showed some improvement between 2009-10 and 2011-12. During this two-year period, around 11 million jobs were created at an annual growth rate of around 1.1% per annum. Both rural and urban India witnessed a sharp decasualisation of employment, especially of females, and a significant improvement in the creation of regular wage employment as compared to previous rounds of the National Sample Survey. There was a faster decline in the share of workers in the farm sector during this period, while manufacturing and service sectors witnessed high growth rates in employment.

Relevance of Keynesianism in the Post-Recession Period

Tracing the rise of Keynesian policies in the post-second world war years to its decline in the 1970s and 1980s with monetary policy playing a central role in macroeconomic stabilisation, this article examines its resurrection in the years following the global financial and economic crisis of 2007-08. It points out that at the heart of the present stimulus-austerity debate is the effectiveness of Keynesian stimulus policies during episodes of growth falling below potential, and classifi es growth crises into three different types for analytical clarity. Analysis shows that though the growth crisis in advanced economies has spilled over into developing ones through trade and investment channels, its nature is different. The focus in these countries should therefore be on addressing supply shocks and structural reforms, including investment in infrastructure, through a change in the fi scal mix.

India's External Sector

The deterioration in India's current account has led to a series of debates in the policy arena relating to sustainability, the importance of exchange rates in infl uencing the trade balance, and the role of high and rising inflation. Against this background, this article takes a step back and analyses the performance of the external sector in India since 1990. It estimates the sustainable current defi cit to GDP ratio to be 2.3%. Importantly, even to sustain a 2.3% CAD, India would need net capital infl ows of the order of at least $50-70 billion annually over the next fi ve years. Given the uncertainty around both the push factors (e g, rising global risk aversion) as well as the pull factors (slower growth in India) that determine capital fl ows, attracting such magnitudes of fl ows could very well be an uphill task.

Can the SDR become a Global Reserve Currency?

Global economic prospects are worsening rapidly. This has revived the debate on the evolving international monetary system and the international reserve currency that will underpin it. Since the 1940s, the US dollar remains the world's dominant reserve currency. Developments since 2008 have challenged the pre-eminence of the US dollar. The euro appeared to have provided an alternative during 2000-08, but has come under fire since early 2010. Prospects for internationalisation of emerging economy currencies are still limited. The global crisis of 2008-09 has resurrected interest in the special drawing right as an international reserve currency. In this paper, we argue that the SDR fails to meet the main attributes of an international reserve currency - deep and liquid markets, supported by currency convertibility; wide use internationally; macroeconomic and political stability in the issuing country. At this juncture, the critical mass of political will to invest the International Monetary Fund with these responsibilities simply does not exist and/or will take a long time to form. Despite shocks and sometimes acute differences in views on the US dollar, the current system has been resilient over decades, and is likely to remain so for some more years.

Where Is the Missing Labour Force?

This paper examines the trends in employment and wages as thrown up by the 66th round of the National Sample Survey Organisation that was the quinquennial employment-unemployment survey. The publication of the summary results has generated a lot of controversy. It is only the nsso surveys that capture detailed comparable data over long time periods, and therefore, it is important that the present survey data is carefully analysed and objectively used for understanding the impact of policy and for course corrections if required.

Reforming India's Fiscal Transfer System: Resolving Vertical and Horizontal Imbalances

Two central problems in a fiscal transfer system relate to resolving vertical and horizontal imbalances. This paper looks at the methodological background of fiscal transfers followed by recent finance commissions, particularly the Twelfth Finance Commission. It is noted that in India, there is long-term stability in the share of states after transfers in the combined centre and state revenues. This stability depends on linking the share of states in the transfers, particularly tax devolution, with the difference in the buoyancies of central and state taxes. In the context of horizontal imbalance, it is argued that some of the recent finance commissions have implicitly followed an axiomatic approach to tax devolution and brought in some normative elements in determining grants. In spite of large differences in fiscal capacities, a high degree of equalisation has been achieved. It is shown that for tfc recommended transfers, nearly 88 per cent of the needed equalisation was achieved while devoting 50 per cent of transfers to resolving vertical imbalance. A methodology is also developed to determine the weights of the vertical and equalising components of transfers through devolution.

Approach and Recommendations

The Twelfth Finance Commission has recommended a scheme of fiscal transfers that can serve the objectives of equity and efficiency within a framework of fiscal consolidation. The effort needed to achieve fiscal consolidation must be seen as the joint responsibility of the central and state governments. For achieving vertical and horizontal balance, consistent with the responsibilities of the two levels of governments in respect of providing public and merit goods and services, both the centre and the states need to raise the levels of revenues relative to their respective revenue bases, exercise restraint in undertaking unwarranted expenditure commitments and prioritise expenditures.


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