The Economic Times
English EditionEnglish Editionहिन्दी
| E-Paper

    Monetary policy can't solve structural problems, it can only address cyclical shocks: Viral Acharya


    Financial stability is a pre-requisite for money policy to get transmitted to real economy, he said.
    Jamal Mecklai of Mecklai Financial Services said the global economy was in a mess and the excess of liquidity was the main culprit.
    The problems of too much capital in the economy and high real interest rates despite a lower inflation numbers were in focus during a panel discussion on monetary policy during ETMarkets Global Summit in Mumbai.

    Former Deputy Governor of RBI, Viral Acharya said that financial stability was a pre-requisite for money policy to get transmitted to the real economy. “If any country does not have stable well-capitalised financial sector, then it will be difficult to get transmission from monetary policy to real economy at the right rates,” he added.

    Jamal Mecklai of Mecklai Financial Services said the global economy was in a mess and the excess of liquidity was the main culprit. He highlighted that there was effectively no inflation and low growth.

    “There is too much capital in the world. For 40 years, capital has been given a free ride when it comes to taxation. Add to it the taxation avoidance, and we have an excess of capital problem,” added Mecklai.

    “20 years ago people were talking about burning capital. There was too much capital in the world even 20 years ago. It has lead to a rising inequality,” he added.

    Mecklai has a radical solution to the problem. He proposed eliminating individual income tax on people who earn less and levy higher taxes on individuals who earn 200 times the minimum salary.

    There has been an increasing demand to have a higher tax on the rich. Founder of Microsoft, Bill Gates is one of the supporters.

    However, when asked what about the fact that such a move will put a hole in government coffers, Mecklai suggested to tax real estate to plug that hole. He pointed out that the value of taxable real estate in New York City alone is in trillions.

    Commenting on the mess the world economies are in, Acharya said that it was not the role of a central bank to solve structural problems. “Monetary policy is not meant to address structural problems of the economy. It is only meant for cyclical shocks. Other policies have to do their job in a complementary manner. If your financial structure are not in place and government finances are not stable then monetary policy is not expected to transmit into fixing the slack in the economy as rapidly.” Acharya added.

    Ashima Goyal, Member, PMEAC, replying to Mecklai’s radical idea pointed out that G20, OECD tax invasion scheme was really going well and taxing revenues instead of profits could be a good idea.

    She also highlighted that the high real rates in India. “Even though the world has a negative interest rate, but for Indian corporates, the real rate was about 12 per cent. How can they invest and be productive in such an environment,” she said.

    Indranil Sen Gupta, Director & Senior Economist, Bank of America added to Goyal’s point and said that even though the WPI inflation was down 250 bps, real lending rate actually shot up by 250 bps.

    Samiran Chakraborty, Chief Economist, Citibank India supporting his fellow panelist acknowledged that high interest rates were a problem. “So called real policy rate is the second highest in Asia. Only improvement is that corporate spread is going down,” he said.

    Sengupta suggested to keep patience as governmental steps take some time to take effect. “At some stage, RBI may need to come out with some direct measures to bring down real interest rates. You are seeing RBI cut rates, government taking measures - it takes 6-8 months for things to pan out,” he said.

    RBI has been in an accomcatove mode and has cut rates by 135 bps since February. In the last policy meet, the central bank said it will do whatever it takes to fire up the economy, which suggested that another rate could be in the offing.
    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    20 Comments on this Story

    Raj Tillan465 days ago
    In India it is IAS who decide be it space craft or handicraft . illiterate voters send semi-literate reps to law houses
    Kochar Bipin466 days ago
    In India, RBI has been excessively focused on inflation instead of real interest rates - it should set monetary policies to achieve a real interest of 1-2% which will not just encourage investment but also boost domestic savings to fund this investment - thus avoid the fire sell of national assets
    FailedResort2Escapis466 days ago
    Those who were in office for 2 to 5 years and giving excuses are UNFIT TO BE LEADERS. Any street urchin can do that - resorting to ESCAPISM . A true professional faces the challenges, overcomes tham and delivers results. Only traitorous media house could think of giving media space to failed professionals resorting to escapism of name calling. NO BODY PREVENTED THIS VIRUS to face up the challenges, explain his position clearly, win the trust of elected people holding power and getting things done for the people.
    The Economic Times