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Debates over appointment of India’s RBI governor and US Fed chairman are revealing

Even for those of us not versed in the intricacies of monetary policy, the institutional and psychological dimensions of two major appointments are quite fascinating. The two largest democracies in the world are shortly going to make their most important economic appointments. The United States will appoint a new chairman of the Federal Reserve, and India a new governor of the Reserve Bank.

Both appointments are coming at a crucial time. While there has been modest good news, the debate over recovery in the US is far from over. India is now in near panic mode on its economy. The panic is not being articulated partly because we have one new political distraction a day, partly because the deep and lingering effects of our current mismanagement have yet to fully kick in. But not since 1991 have we been on the verge of such a deep crisis, which now threatens to become a vicious circle, where a high current account deficit, inflation, paucity of investment, declining savings rate and sheer uncertainty threaten to feed off each other. We have unprecedented capital flight. Panic also leads to self-defeating short termism. Think of the enormity of our slide. We are openly talking of import controls. Capital flows can, under some circumstances, be a good thing. But one knowledgeable investor observed, after Finance Minister P. Chidambaram’s last visit to Washington, that India now seemed to be saying, we need hot money mutual funds to rescue us. Unintentionally, we send the signal of craven dependence. This is a bad place to be in. In such a context, the role of the RBI governor is going to be stressful in an unprecedented way. But both the chairman of the Federal Reserve and the RBI governor must feel at times that the fate of civilisation rests on their shoulders. Of course, the economic and political contexts of their appointments are vastly different. But the debates over different candidates in the two contexts are quite revealing.

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