Wednesday, August 26, 2020

How not to reform the IAS

Today's TOI carries an article by two ISB profs on reforming the IAS. Frankly, I find the proposals impracticable.

The authors propose that at the end of seven years, IAS officers be given the following options;

Continuation in the service at a prestigious senior position for which the officer may have to compete with other experts from outside the service who could be inducted laterally (something that Prime Minister Narendra Modi has espoused).

A fully paid scholarship to any PhD, MBA, or other top professional programmes in the world (eg Harvard MBA, Princeton Masters in Public Policy, or a PhD at the University of Chicago) into which the officer can get admission based on his or her merit.

  A Rs 1 crore seed capital from a capital fund run by professional venture capitalists to begin an entrepreneurial startup venture
Those who can compete with. Others will try to upgrade themselves with higher studies. Those who want out can be turn entrepreneurs.
Well, it's not clear that the alternative to being in the IAS is becoming an entrepreneur. But even if some want to take the plunge, the government cannot, by any stretch of imagination, lavish Rs 1 crore on anybody who wants it. How do you ensure accountability of the money spent?

As for the second option, it is already being exercised.  Many go for higher studies, a few quit thereafter.

It is also not possible to get IAS officers to compete with outside experts for all positions. This can happen only for a few positions that require technical expertise.For the vast majority of generalist positions, outsiders can't fit in- the IAS training and background are indispensable.

The authors also propose that the government recruit from professional courses even at the entry level. That would completely undermine the IAS exam. Today, IITians and IIM students appear for the IAS exam. The authors are saying they- and others from professional courses- could be hired from campuses, as  happens with corporates. This overlooks the fact that the IAS written exams plus interviews look for qualities other than mere technical competence. That is what gives the IAS exam its cachet and ensures high quality of recruits.
 By and large, the IAS at the centre remains meritocratic above the joint secretary level. And the pressure to perform is pretty intense. The problem is at the states. That has to do, not just with the motivation and incentives of IAS officers, it has to do with the way politicians run the system. That calls for reform of a different character from what the IBS profs propose.

Sunday, August 23, 2020

RBI, financial stability and central bank independence

 Viral Acharya, the distinguished academic who served as Deputy Governor of RBI from December 2016 to June 2019,  has been vocal on the subject of financial stability over the past several weeks.  

In several interviews and webinars following the publication of his book, Quest for financial stability in India, Acharya has said that lack of concern for financial stability on the part of successive governments has led to recurring problems in the banking system. This, in turn, has resulted to growth getting stalled time and again. 

The book is a collection of speeches Acharya made as Deputy Governor. The highlight is a lengthy introduction that Acharya has written in which he expatiates on the importance of financial stability. Acharya says that during Urjit Patel's tenure as Governor, the RBI made a valiant attempt to defend financial stability but, ultimately, could not stem pressures in favour of faster credit growth at the expense of stability. He suggests that both Patel and he had to quit as they could not reconcile their stand on financial stability with that of the government.

Acharya contends that the root cause of financial stability is what he calls 'fiscal dominance', that is, the imperative of governments having to spend in order to boost growth, no matter what the implications for the fiscal deficit. After a point this becomes untenable.Governments then lean on the central bank to facilitate faster growth through credit expansion. 

This invariably involves sacrificing financial stability in a number of ways- by not recognising bad loans and the associated losses, not recapitalising public sector banks as required, manipulating the yield curve to keep interest rates low so that governments can borrow cheaply, etc. Compromises on financial stability result in banking crises and weak growth down the road. 

The answer, Acharya suggests, is first to ensure that fiscal discipline is practised. Secondly, to ensure that the RBI enjoys greater independence, preferably conferred by law, so that it can resist pressures to compromise financial stability.

There are problems with the thesis. First, it is not true that credit booms and financial crises result exclusively or mainly from fiscal dominance. The global financial crisis of 2007 as well as multiple bank crises in numerous economies in the past several decades did not flow from fiscal dominance.

Secondly, financial stability can result from excessive concern with financial stability at the expense of growth. If you are too focused on inflation and allow growth to weaken, that itself can cause financial stability. If you are not willing to relax regulations in unusual times, such as the pandemic, and insist that defaults should automatically result in loans being categorised as non-performing assets, you are going to create a major banking crisis here and now- in the cause of financial stability. Find me one banker who thinks that the loan restructuring scheme announced recently by RBI is not desirable and that we should accept Urjit Patel's contention that a restructured standard asset is an oxymoron.

Thirdly, conferring independence on the RBI by law is a bad idea. Matters of monetary policy and regulation cannot be decided by technocrats alone. It is the elected government that is accountable to the people for its decisions that must have the final say. This is because monetary policy and regulation involve choices about trade-offs between growth and stability and they have distributional implications. These choices cannot be made by technocrats sitting in Mint Street. If central bankers are not to accountable to the government, how will make them accountable? We need a vibrant media, swift judicial redress and a culture of peer pressure that will ensure accountability once central banks are given independence by law. Those conditions are not satisfied in India today.

Fourthly, it's extremely naive to think that governments make "political" choices while technocrats are utterly apolitical or detached in their approach to questions of public policy. All public policy choices are overtly or implicitly political in nature and central bankers are political animals in their own ways. We know central bankers are not unworldly in their outlook: many have the happy gift on landing juicy positions with private banks after they have demitted office. 

We have to accept that those elected to office have the right to decide matters of public policy. If they make mistakes, the electorate has the choice of voting them out the next time. Pitting the saintly technocrat against the diabolical politician can only undermine democracy and pave the way for the technocracy known as dictatorship. 

More in my column in BS, Technocrats versus politicians