It all started with deputy governor Viral Acharya speaking of violation of RBI’s independence by the government, and noting that such excess may lead to market forces creating havoc in the economy. This he did with the backing of governor Urjit Patel in mid-October. Acharya’s remark reflects hardening of positions and a breakdown in communication between the regulator and the government.
It was simmering for some time. But bringing it out in open upset the government, leading to RBI’s criticism by finance minister Arun Jaitley, Ashwani Mahajan (co-convenor of Swadeshi Jagran Manch) saying RBI officials should refrain from making the rift public, and rumours of Patel possibly resigning flying all around. The talk of applying section 7 of the RBI Act aggravated the situation. All this has come at a time when the government is being criticised for feud in CBI and Supreme Court judges flaying it for attempt to influence judicial functioning.
Acharya cited three specific areas of interference by the government – demanding transfer of higher share from RBI reserves to public coffers, limiting its supervisory control over PSBs, and restricting its regulatory scope, for instance, over payment banks. He asked the government to back off before the market forces pay it for transgressions.
There have been instances leading to this situation. In June 2017, RBI turned down the government’s request for a meeting between the finance ministry officials and the monetary policy committee, which sets the interest rates, ahead of a policy review. In February, RBI put out a circular that required banks to refer any account with Rs 2,000 crore plus loan to bankruptcy court if it’s not resolved within 180 days of default. RBI has so far been resisting attempts to soften it.
After the Rs 11,000 crore PNB scam, the government tried to point fingers at RBI. Patel responded by saying RBI lacks adequate control over PSBs, the government has more powers, and it can’t be held responsible for a PSB crisis. It also blamed government for NPAs saying PSB boards were allowed to conceal bad loans for far too long. The government claims it was kept in the dark about RBI’s prompt corrective action norms in April 2017 and revised framework to identify NPAs.
The IL&FS default also led to some disagreements, with the finance ministry consistently pushing RBI to make it easier for NBFCs to get credit, since it’s worried about a liquidity crisis. RBI insists IL&FS fallout has not spread for it to act.
When an inter-ministerial committee recommended that the payments ecosystem should be regulated by a new institution, rather than RBI, the central bank in a rare dissent note circulated publicly argued keeping banking and payment regulations with the same institution inspires public confidence.
The composition of RBI board has been another point of contention. The government removed Nachiket Mor without any intimation and appointed S Gurumurthy, convenor of Swadesh Jagaran Manch, on RBI board. The government is pushing RBI to relax lending norms for small businesses and pump more liquidity into the market to bolster economic growth before key state elections due in few weeks and the 2019 general elections. It is striving to show that the buck stops with the ruling party to regain public vote. RBI is right to contest the government plan to weaken its hold over payments banks. It may also be correct in blocking government overreach in forcing it to inject more liquidity than it wants into NBFCs.
Money in RBI kitty is another bone of contention. Acharya said the government had determined that Rs 3.6 lakh crore of RBI reserves were “excessive” and should be transferred to the government. But RBI needs that cash to do its job properly – to manage the money and forex markets in case of a crisis. It is also the banking regulator and the “lender of last resort” if some crucial part of the financial system runs out of money and threatens to bring the entire structure down. Also, any sign that the government is raiding RBI vaults to fund its election year spending will be seen by the market as erosion of RBI’s strength and independence and have brutal repercussions across the board. Investors need to believe RBI is working to keep markets secure and liquid – and not only to provide funds to the government. Loss of trust in the central bank is loss of trust in the financial system.
Thus, public perception is that RBI’s battle to ensure professionalism (against populism) and caution and sternness with regards to bad loans have led to the current rift with the government.
Section 7 of RBI Act: The section, which has never been invoked, enables the government to issue direction to RBI. The RBI Act says, “The central government may from time to time give such directions to the bank as it may, after consultation with the governor of the bank, consider necessary in the public interest.” If the government invokes section 7 to pressure RBI in the “public interest” it would be a case of ideological irony for Modi who promises “minimum government but maximum governance.” YV Reddy, ex-RBI chief, is credited with the view that India’s central bank is independent “within limits”. He said in 2008: “I am very independent. The RBI has full autonomy. I have taken the permission of my finance minister to tell you that.”
To understand the deeper reality of the confrontation, one needs 3 D’s – democracy, demographics and development. These 3 Ds were at the core of the decision-making that went into the nationalisation of banks in 1969. The upheavals between 1950 and 1970 changed RBI forever, from being a mere manager of the monetary system to an active participant in the development effort. Nothing has changed since then. But since liberalisation was ushered in 1991, the worldview of Indian regulation shifted from “development banking” to a western-style hands-off approach at least in principle if not in practice. Both Patel and Acharya represent post-1991 worldview inspired by the US Federal Reserve or the European Central Bank, forgetting that neither the ground political reality nor the RBI Act supports such a luxury.
It’s critical for the government to not just respect the de jure autonomy of institutions, but also ensure de facto independence in its functioning.
(The writer is dean of school of media, Pearl Academy, in Delhi and Mumbai)