Thread by @Sabya_K

Very useful to have views and counter-views on these issues. So thanks to Viral Acharya and @dugalira for the interview and @teasri for the counter.

Would like to add a few points from a political economy perspective:

1. Agree with Viral that the banking sector has always been misused in India for political economy reasons. But assuming that the legislation of rules will prevent this is not consistent with developing country experiences.

It is well established in the institutions literature that countries simply pretend to implement rules but work around them when they are politically difficult to implement. Lant Pritchett calls this *isomorphic mimicry*.
Just look at how our budget deficits are being managed.

2. On the Inflation Targeting framework. Viral is right that the IT framework has experienced far less political interference than the banking sector or liquidity management.

But that is also because of political priorities.

As long as growth and inflation rates are reasonable, monetary policy and the policy interest rates are not politically salient. Notice how low growth rates have started putting political pressure on monetary policy in the last year or so.

By comparison, the banking sector and liquidity management (proxy for deficit monetization) are far more political because they have important implications for the two important political activities of any government - State-business relationship and clientelist welfare programs.

3. About the IT framework, there is an argument made that it has been reasonably successful in the short period following it's implementation in India. I would argue that this is because it has not really faced a politically challenging situation like a stagflation.

To sum up, my arguments are not against the adoption of rules. Rules are very useful in making economic policy predictable and help in encouraging private investments. But ignoring political realities and adopting unimplementable rules will lead to creative ways of avoiding them.