When the Governor gets it wrong, his reputation is at stake. When the MPC gets it wrong, the economy pays a price.
Last week, the six astrologers who collectively constitute the Monetary Policy Committee (MPC), admitted that they again got their inflation forecasts wrong. The committee, headed by Reserve Bank of India (RBI) Governor Shaktikanta Das, revised its inflation forecasts down again, two months after it did so in December.
The MPC, in its statement of 7 February, said “the path of CPI inflation is revised downwards to 2.8 per cent in Q4 2018-19, 3.2-3.4 per cent in H1 2019-20 and 3.9 per cent in Q3 2019-20, with risks broadly balanced around the central trajectory.” Just two months ago, the same group of astro-economists (the only change being the change in RBI governors with Das replacing Urjit Patel) had projected CPI inflation “in the range of 2.7-3.2 per cent in H2 2018-19 and 3.8-4.2 per cent in H1 2019-20, with risks tilted to the upside.”
In other words, not only did the MPC 'astronomists' get their inflation range wrong, but they even got their direction wrong. They expected the risks to be “tilted to the upside”, but last week they corrected themselves to claim that the risks were “broadly balanced”. This is as close as we are ever going to get to a mea culpa. The latest retail inflation print of 2.05 per cent for January 2019 shows that the MPC’s latest revision is already looking off the mark. If February and March CPI come below 2.8 per cent, the MPC will have gone wrong again.
And even while correcting past mistakes, the MPC found itself split 4-2 between those who wanted to cut the repo rate by 0.25 per cent and those who wanted to maintain status quo (Deputy Governor Viral Acharya and Chetan Ghate, the latter being one of the National Democratic Alliance’s own appointees). The only thing all six agreed on was that the policy stance can be changed from “calibrated tightening” to “neutral”, a stance the MPC arrived at last in February 2017, precisely at the point when demonetisation had taken the wind out of the economy’s sails and banks were crashing deposit rates as their coffers were full of cash.
The MPC has mastered the art of wrong timing and has learnt nothing from the fiascos of 2017 and 2018. The only difference this time is that there is a more politically aware Governor at the helm to correct the biases of the economists-turned-incompetent astrologers. Hence the rate cut, which should actually have been a higher 0.5 per cent.
John Kenneth Galbraith, former ambassador to India during the Kennedy administration, had once remarked that “the only function of economic forecasting is to make astrology look respectable”.
However, it must be said in favour of astrologers they only tell you what you may want to hear, and they don’t tend to predict exact outcomes. At the very least, astrologers help put you in a better frame of mind even while actual events may prove them right or wrong. But the MPC, by trying to be perfect astrologers, get it wrong almost 100 per cent of the time.
Moreover, when we use astrologers, we don’t ask for second opinion or third opinion. We seldom ask six astrologers about our chances of winning the next lottery and aggregate their forecasts to arrive at the 'right' forecast. We can dump our astrologers or stop believing in astrology altogether if they prove consistently wrong. But this is not possible when we poll six astrologers – or the MPC – for no one has a responsibility to you.
One can argue that in an economy where two unpredictable groups of commodities – food and fuel – constitute the bulk of the consumer prices index (CPI), it would be wrong to blame the MPC. It cannot exactly divine the variable moods of OPEC or the rain gods. But this should have led us to the conclusion that they should not try and second-guess the outcomes, and make foolish forecasts that will be outdated barely two months down the line – as has been the case between December and February, when inflation forecasts were revised.
The simple takeouts from our experimentation with the MPC over the last two-and-a-half years are these.
One, six heads are not necessarily better than one (the Governor). Even the Governor as a standalone policy-maker is not bereft of advice on inflation forecasts, just as the average Indian does not lack astrological advice.
Two, inflation cannot be the sole objective of the MPC. Growth and jobs should also be part of its mandate, provided we are to continue with the committee. So, if you want rate policies to be decided by data, the MPC must take an overall call based on all these objectives, and not just CPI data.
Three, accountability for wrong rate policies get diffused in the MPC. Rate policy should primarily be the job of the RBI and its Governor, and diluting this responsibility is not 'reform' of any sort. When the Governor gets it wrong, his reputation is at stake. When the MPC gets it wrong, even consistently, no one (except the economy), pays a price.
This does not make sense.