If they are sovereign, what are we?

Last month Reserve Bank Governor, Raghuram Rajan suggested that the government should set the target for inflation so that the RBI knows exactly what to aim for in its monetary policy. In the past our most revered Finance Minister has been of the opinion that it is the duty of the RBI to stimulate growth by keeping interest rates at low levels regardless of how high the inflation is, as he said in his melodramatic " we will walk alone " speech. Mr Rajan wants to head off any tension in the future and wants to put the responsibility directly on the politicians. If they set a high figure people will know that they are responsible for rising prices, and punish them at elections, India's credit rating will be in jeopardy and the rupee will nosedive. Since politicians will not be able to pass on the blame they will think twice before wasting trillions of rupees on social schemes to buy votes. The Finance Minister has agreed wholeheartedly. " I think that is the correct approach," he said. " The sovereign has the right to set the target and then the central bank has the mandate to take steps to achieve the target." Wow! We did not know that he is our sovereign. We thought that politicians are elected only to represent our interests and to make the country stronger economically and militarily. Knowing that our politicians act only in their own interests it is natural to be suspicious, especially since the figures given by the government are suspect. Officially, the Current Account Deficit in the December quarter has fallen to $4.2 billion from $31.9 billion last year. This is attributed largely to a fall in import of gold because of increased tax on gold and stringent restrictions on its import. Till November 2013 import of gold is said to have fallen to 655 tonnes but according to the World Gold Council demand for gold has risen by 13% to 975 tonnes last year. That means that 150 to 200 tonnes of gold has been smuggled into the country. Which means that the CAD has been understated by $8.5 billion. Although the price of gold has been falling the price in India is higher than that in Dubai by Rs 4000 per 10 grams, so the profit on 1 kg of gold is Rs 500,000. Smugglers are using ever ingenious methods to bring in the precious metal. Some is being brought in legally by Non Resident Indians. So, the fear is that not only will they set a high rate for inflation but we will not know the right figure anyway. Are we allowed to question our sovereign?