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P. R. Brahmananda

THE Reserve Bank of India has come out with its exquisitely printed `Report on Currency and Finance 2000-01'. Till a few years ago, the annual Reports on Currency and Finance were the best sequential sources of information and analysis of the course of the economy during the relevant years. They provided rich material to serve as the basis for thousands of research dissertations by students of the Indian economy. The level of presentation was such as could be understood by graduate students in economics.

In earlier years, the Report was a single-volume document. Gradually, it spread itself out in two volumes, the first dealing with analysis and the second with statistical information. This tradition has now been altered slightly. The Report contains interpretative studies of aspects of the economy's current problems; these studies, however, present results of hypotheses-oriented applications of econometric techniques. The document is interspersed with graphs, diagrams, number-filled equations, references to international studies on similar themes, and so on.

Probably, post-graduate students exposed to quantitative techniques can get a feel of the findings on different subjects treated in the Report. Unless the administrators in New Delhi and political leaders who determine policies possess the required technical background, they may not be able to comprehend the Report. But the Report on Currency and Finance is not a Statutory Report and, hence, they should not complain. There is also now a separate volume of `Handbook of Statistics', which contains the basic information on the course of crucial economic magnitudes. The Report, however, merits careful study. What do the experts in the RBI think about the current travails of the economy? Why has the growth rate of real GDP come down? What are the effects of the enormous increases in liquidity? Why are not the savings-investment ratios moving up with the huge expansion in liquidity? Why is it that the reductions in interest rates are not getting reflected in increases in the level of real output? What is the relation between the inflation and growth rates?

Is there an optimal or threshold rate of inflation? Can the threshold rate be identified with a particular number? Does a rate of inflation lower than the threshold rate lead to a reduction in the level of current real output? What is the ideal current account deficit ratio in the economy? Does public consumption crowd out private consumption? Does public investment crowd out private investment? Can government funding of infrastructure expansion be complementary with private investment? Why has agricultural growth rate come down?

Is the economy going through a cyclical phase? Can a further reduction in interest rates help speed up recovery? What about the experience of Japan where interest rates are close to zero, but the economy continues to wallow in a prolonged recession? Is the Indian economy more and more affected by the course of the world economy? Should the central bank be given independence with mandated directives? Does excess liquidity lead to a spillover in the exchange market moving up the forward premia? Does it get reflected in a downward drift in the exchange rate?

I have just listed a number of issues touched in the Report. Each issue is important by itself. The findings of the Report — that should not be associated with the RBI's official opinion — are controversial. When an economist deals with one dependent variable and one independent variable along with the constant term, the economist is said to be a two-handed economist. But when he deals with one dependent variable and several independent variables, he is said to be a multi-handed economist. Multivariate regressions are of this form. But when he deals with several dependent variables and each variable has several independent variables, the economist is like several multi-handed entities.

The model is one of simultaneous equations! Fortunately, the Report has not yet presented the results of a simultaneous equations model. But the RBI Deputy Governor, Dr Y. V. Reddy's lecture at the Econometric Conference in Chennai refers to the modelling work going on inside the Bank with the help of the brilliant trinity of Dilip Nachane, Manohar Rao and Vikas Chitre, and others under the supervision of Mihir Rakshit.

We must, however, note that every regression equation is a model and with so many variables as well as parameters, the number of possible models is immense. So also in respect of the model for the economy. The bias of the modellists is reflected in the specifications. In India, supply influences are extremely important. There is no general excess capacity in India, as in the case of developed countries. We do not know whether cycles are generated within the economy. Growth, rather than stabilisation, has to be the key goal, and growth has to be tempered with growth in employment and social justice. The model also must satisfy the regional aspirations of different parts of India. However, one must congratulate Drs Jalan and Reddy and others in the Bank, like Dr Vasudevan, who initiated sophisticated research inside the Bank, for the great strides in technical presentation the RBI is now deservedly known for. Earlier, Dr Rangarajan himself had initiated modelling work at the Bank. Drs Pani, Venkatachalam, Kameshwara Rao, Chakravarty, Jadav, and Hymanshu Joshi are among the names well known from the RBI in the area of macro-econometric modelling.

At the Delhi School of Economics and the Institute of Economic Growth, Drs Nagar, K. Krishnamurthy and B. Bhattacharya have worked out macro-econometric models for India. The National Council of Applied Economic Research has also done work in this area.

Probably, very few central banks in the world can compete with the RBI in the depth and level of internal research in the organisation. But, as Dr Jalan pointed out recently, several big banks in India also must have similar research departments, as is the case in the Federal Reserve system in the US. We have a long way to go here. The RBI must take the lead in helping the banks expand their research outfits.

For meaningful discussions as in the US, the universities must also be equipped with research outfits similar to that in the RBI. Differences of analysis and interpretations are important in a democracy. The US has a National Bureau of Economic Research that the world envies. But we have many more miles to go. Probably, the RBI and the Finance Ministry, as also the Planning Commission, should together take the lead in making the research environment in economics comparable to that in the US.

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