Prime minister Narendra Modi may need to step in to end the ongoing feud between Reserve Bank of India (RBI) governor Urjit Patel and finance minister Arun Jaitley that has escalated into a full-blown war. Precipitating the situation is in nobody’s interest. The Centre, for its part, ought to respect and ensure functional autonomy of the central bank. As for the RBI, its governor or his deputies should not enter into a slanging match with the finance minister of the day. In the present context, Jaitley as finance minister and Patel as RBI governor have well defined roles. They need to discharge their duties independently but in tandem. Both need to draw a line, the proverbial Lakshman rekha, and work as partners.
Deputy governor Viral Acharya would not have lambasted the government and its purported interference into RBI affairs without the explicit consent of the governor. Picking up cudgels with the government may not be the best course for the RBI. Similarly, Jaitley would not have hit back publicly at the RBI for the mess created during 2008-14 in lending operations by public sector banks without prime minister Modi’s nod. Otherwise, there would be no reason why Jaitley would have referred to the government’s powers to invoke the dreaded section 7 of the RBI Act and issue directions to the RBI governor on monetary issues in the public interest.
While central bank governors have regarded even citing the dreaded section as a sacrilege of sorts, finance ministers have never hesitated even in the past to remind the RBI about the powers to issue directions or even sack the governor citing “in public interest”. Better sense should prevail on both the finance ministry and the RBI. They need to back off, cool their heels and move on with the tasks at hand. While there may be an element of truth in reports about the RBI governor’s purported offer to put in his papers, this may not be the best way for Patel to deal with government that differs with him.
The RBI will do well by taking government inputs and concerns on board while dealing with weak banks’ lending operations. Complete squeeze on credit by these banks may stymie growth especially in an election that could be a natural concern for the ruling party and the centre. The BJP government at the Centre may have to appreciate the limitations of these banks especially at a time when non-performing assets clean up is underway. Secondly, the RBI and government may not be on same page vis-à-vis IL&FS and other ‘systemically important’ non-banking finance companies that have a very substantive role in lending and project finance operations. Uday Kotak and his board will have to be given full autonomy and opportunity while dealing with IL&FS affairs without intervention from the RBI or the finance ministry. Third, small and medium enterprises loans have always been a priority segment for both banks and NBFCs. Hence, this segment of the industry that has modest NPAs can’t be starved of debt funds.
Logic, reasoning and rationale with focus on running the economy smoothly, ensuring integrity of the markets and keeping the monetary system intact should be the basis for a healthy relationship between the RBI and the government. The first is in charge of monetary policy and the second has the task of ensuring economic growth. For the two to be at loggerheads is not good for the country. However, the political leadership has taken a view in the matter and if it has decided to go forward in its efforts to make sure that the market is not starved of liquidity, since it will in its view boost growth and create a rosy picture of the economy in an election year, then it has to be clear about the road it is taking.
Given that frictions between the RBI governor and the finance minister have happened in the past, fresh attempts need to be made at reconciliation. One such attempt was made on Tuesday during a meeting between Jaitley and Patel. More such interactions and an intervention from 7, Race Course would be in order.