National Council of Applied Economic Research
Opinion: Mythili Bhusnurmath
The jugalbandi between RBI and GoI went well beyond the blurring of traditional boundaries that we saw elsewhere in the world to something close to an exchange of roles. We saw government act like a conservative central bank holding tight on to its purse strings even as RBI acted like a populist government and pumped in money seemingly heedless of the long-term adverse consequences to its core mandate inflation-control.
A year ago in this column I had predicted that 2021 would see ‘a burying of the hatchet between    governments and central banks. To be replaced by a jugalbandi that sees one step in almost seamlessly into the role traditionally reserved for the other.’
At the cost of being accused of blowing my own trumpet that’s exactly what happened. Central banks and governments rose as one to ward off the economic Armageddon unleashed by the Covid pandemic. Central banks forgot their obsession with inflation and governments with fiscal deficits. The global economy averted an economic catastrophe. After a collapse in the immediate aftermath of the pandemic growth has recovered across the world. The International Monetary Fund (IMF) estimates global growth at 5.1% in 2021 and 4.9% in 2022.
Having tasted success once I am tempted to try my luck and read the tea leaves again. So here it is: 2022 will see a painful end to the bonhomie between central banks and governments that marked 2021. It will be replaced by a reversion to norm that sees them go their separate ways. For want of a better name I’m going to call 2022 The Year of the Great Normalisation a year when after a long hiatus central banks and government revert to their core competencies – the former (including RBI) even if belatedly – to inflation control and the latter to promoting growth.
In the Indian context this will be a watershed event. This is because the jugalbandi between RBI and GoI went well beyond the blurring of traditional boundaries that we saw elsewhere in the world to something close to an exchange of roles. We saw government act like a conservative central bank holding tight on to its purse strings even as RBI acted like a populist government and pumped in money seemingly heedless of the long-term adverse consequences to its core mandate inflation-control.
Contrary to what received wisdom tells us about elected governments looking to the main chance with their eye never beyond the next elections the BJP government seemed strangely reluctant to spend its way out of trouble. Never mind that many including fiscal conservatives conceded that if ever there was time to give fiscal prudence a go by it was in 2021 during the once-in-a-century pandemic.
Rock Thy Role
The RBI on the other hand more than made up for fiscal coyness. Never mind that the jugalbandi of fiscal and monetary policies which saw governments and central banks disregard their timeframes and work in close coordination had reached its tipping point by late 2021. Never mind also that further easing of monetary policy was clearly delivering less and less additional growth and more and more inflation.
But with better-than-expected growth in GDP in the second quarter of the current fiscal and higher-than-expected inflation both GoI and RBI will have no choice but to return to their core competencies in 2022. In keeping with the zeitgeist they will have to focus on their swadharmas growth and inflation control respectively.
Remember fiscal policy is framed by governments whose interest never goes beyond the next election. Monetary policy in contrast is framed by experts who don’t have to worry about winning elections and hence can (thankfully) afford to take a lofty long-term view.
Joe Biden’s statement on inflation – ‘Reversing this trend is top priority for me’ – is an early signal of the impending return to norm. Remember it was not so long ago that Donald Trump called Federal Reserve Chairman Jerome Powell a ‘more dangerous enemy than Chinese President Xi’ for opposing lower interest rates. And where the US leads the rest of the world must follow. Never mind RBI’s brave talk of inflation in India being different from that in the US.
Conceding the word ‘transitory’ is no longer the most accurate term to describe the current high inflation rate Powell admitted ‘It is probably a good time to retire that word.’ Adding it would be appropriate for the central bank to consider wrapping up its ‘taper’ of large-scale bond purchases more quickly.
Powell is not the only one. Lutfi Elvan the Turkish finance minister who was sacked by President Recep Erdogan in December 2021 came close to defying his authoritarian head of state calling on ‘each institution [government and central bank] to do its part within the scope of its own mandate’ to tame price increases.
Unknown Enemy a Friend?
Sure the ghoul of Omicron is on us and 2022 may see more mutant strains emerge. But policies framed for exceptional times cannot become the norm. As governments and central banks in most countries are realising belatedly jugalbandis have their limitations. Worse they could have serious adverse consequences: high and possibly persistent inflation. The motto for jugalbandis must be: till inflation do us part.
Postscript: If that’s my prediction for the macro scenario the major micro (pardon the oxymoron) predictions for 2022 include the rise and fall of the cryptocurrency madness the end of Libor (London inter-bank offered rate) as a benchmark in cross-border transactions and of course many unknown unknowns.