I would say financial sector regulation is the number one area where I think tax domination has its dominant influence. The reason is simple. There is still a strong presence of public sector banks in our financial sector. We have an inheritance problem. I don’t even want to call it an inheritance issue anymore, it’s an ongoing issue of their lack of adequate capitalization for the risks they take.
Invariably, this is something the board must plan for. Because we are always catching up rather than capitalizing these banks so that they make sound decisions and have the buffers to bear losses; it’s easy for the owner of these banks to turn to the regulator and just say relax the rules, give that kind of concession, that kind of concession so the budget doesn’t have to make the hard adjustments that are long overdue.
I think what I experienced in my time was that budget management was completely turned upside down. I think the FRBM targets were violated left, right and center, the accounting was, I think, pretty pitiful. All budget management has done is juggle above the line, below the line, on the balance sheet, off the balance sheet, before January 31st. after January 31. There has been no real and significant fiscal consolidation, prioritization or reorientation of spending for the long-term growth of the economy.
The reason this is important and the reason I highlight it as the central issue is that it then leads to a relaxation of banking regulation, which applies not only to public sector banks but also to other players in the banking sector. financial system.
On the monetary policy side, we are very fortunate to actually have an institutional framework that prevents the central bank from giving in so easily. It has an explicit inflation targeting mandate. It is flexible in the sense that some attention must be paid to growth and while different committees, members and governors may interpret the term slightly differently depending on their relative destinies, it is a legal term. Ultimately, they are responsible for whether the warrant has been fulfilled or not.
The third point you raised was the liquidity policy. I would say it’s a bit in between, it’s entirely up to the central bank. There is no institutional framework that guides it. In fact, if you remember from my two and a half years, people even asked us if targeting the repo rate as a framework objective was right, even though ultimately it is the policy tool that the central bank has and if you can’t achieve this in the money markets, what’s the point in calling it your target policy rate?
So I think there is a slippage on the liquidity front because there is no related institutional framework. As I lament in the book, I think liquidity management ultimately, directly or indirectly, is geared towards setting the yield curve on government bonds. This is also often done to achieve a pass-through of monetary policy rates, but the pass-through is first and foremost only in the government bond market.