Let me say a few words about economists. Their vital role in shaping public perceptions and discourses and in designing strategic policies in the corporate sector, central banks, governments and multilateral; institutions, is more often than not unsung. Rigorous research and training helps in formulating informed set of policy choices and consequent decisions. In the domain of public policy, we have to distinguish between the direct and the indirect impact that economists can make. The former is what we usually think of when we consider how experts might affect formulation of a policy, say, minimising the subsidy burden on the exchequer. However, their greatest contribution to policymaking may take place through less direct routes such as through their research by nudging policymakers to think about economic problems/challenges in newer/different ways.

Policy makers too have a crucial role in creating an enabling environment for economists to contribute to society. In this context, the Government of India has to be lauded for instituting three land mark reforms in recent years. One cannot and should not underestimate the sagacity and uncommon courage of the Government to undertake reforms that can only be described as truly transformative. These will shape, for the better, our economic evolution in the years and decades to come.

In 2016, the Government legislated amendments to the RBI Act to invest the Reserve Bank of India with the specific mandate to operate the monetary policy framework of the country whose primary objective is to “maintain price stability while keeping in mind the objective of growth.” This was a fundamental shift in the institutional architecture for the conduct of monetary policy, with the formal transition to a flexible inflation targeting framework and the relinquishing of the monetary policy decision by the Governor to a six member monetary policy committee (MPC).

Another momentous reform is the establishment of the GST council whereby the Government of India has created one of the most effective institutional mechanisms for cooperative federalism. Along with the State Governments, it has offered a refreshing counter-narrative to the divisive course of the international federal dialogue, voluntarily choosing to relinquish and then pool sovereignty for a larger collective cause. Also, the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) is a watershed towards improving the credit culture in our country. The IBC provides for a single window, time-bound process for resolution of assets with an explicit emphasis on promotion of entrepreneurship, maximisation of value of assets, and balancing the interests of all stakeholders. These steps are unprecedented in the history of our nation in that they show the Government’s commitment to sound public policy by establishing institutions and ceding power to them to perform functions vital for securing and entrenching macroeconomic and financial stability.

Economists are often misunderstood and at times maligned. To illustrate, economists are heaped with the criticism that they failed to see and predict the 2007-08 global financial crisis, and this has dented the credence of their profession.

To my mind this is patently unfair. Doctors understand diseases but cannot predict when one will fall ill. The fundamental mission of economists is not to forecast crises but to explain how mankind behaves in the ordinary business of life and in doing so they do warn of crisis formations, suggest pre-emptive strategies and formulate mitigating policies that address those crises that slip through macroeconomic surveillance. More often than not, they meet with resistance. Hyman Minsky laboured in relative obscurity from the start of his academic career in the 1950s until 1996, when he died.¹ His research about financial crises and their causes attracted little mainstream attention back then. It was only in 2007 when the subprime mortgage crisis erupted, that everyone started turning to his writings as they tried to make sense of the chaos engulfing global financial markets. The eruption of a financial crisis from a state of dormancy or calm is now often referred to as the “Minsky” moment. In another striking example, George Akerlof’s landmark paper “The Market for Lemons,”² was rejected by several journals before it was finally published. As time passed, his seminal paper brought home the wisdom that adverse selection was a fundamental cause of market failures and the idea turned into a foundation stone of information economics.

New and fresh ideas often meet a wall of resistance as they tend to challenge inertia in the existing shores of thinking. In my own profession as central banker, thinking new and fresh is demanded by the ever changing world in which we operate. To give an example, we have been trying to understand household and firm behaviour through our surveys and analysis. However, the need now is to understand micro-level price formation dynamics in new dimensions such as e-commerce, digital transactions and big cross sectional data. This applies to domains such as banking, non-banking financial intermediation, payments, currency management and financial inclusion as well. In the absence of this type of research, policy choices could yield sub-optimal outcomes at times. There is an acute information deficit regarding the unorganised sector in India, despite its significant role in income and employment generation.

The absence of official or non-official statistics has not, however, prevented economists from conducting survey-based studies to help understand its dynamics.

In closing, I would like to quote Paul Romer, a pioneer of endogenous growth theory, from his much cited paper “The Trouble with Macroeconomics.”³

“Even when it works well, science is not perfect….Scientists commit to the pursuit of truth even though they realise that absolute truth is never revealed. All they can hope for is a consensus that establishes the truth of an assertion in the same loose sense that the stock market establishes the value of a firm. It can go astray, perhaps for long stretches of time. But eventually, it is yanked back to reality by insurgents who are free to challenge the consensus and supporters of the consensus who still think that getting the facts right matters.”

By Urjit R. Patel

Governor of the Reserve Bank of India.

References

1 Hyman Minsky [1986], “Stabilising an Unstable Economy”, McGraw-Hill Professional, New York.

2 George Akerlof [1970], “The Market for Lemons: Quality Uncertainty and the Market Mechanism”,

Quarterly Journal of Economics, Vol. 84, pp. 488–500.

3 Paul Romer [2016], “The Trouble with Macroeconomics,” The Commons Memorial Lecture of the Omicron Delta Epsilon Society, January 5, 2016.