The seemingly conciliatory note sounded by RSS ideologue Swaminathan Gurumurthy on the rift between RBI and government – when he says friction between them is undesirable – is a good development but it is difficult to say whether it can be considered a good omen for the November 19 meeting of the RBI board. Of the four independent directors co-opted on to the RBI board, Gurumurthy is the most senior and it is important to know what he says considering his Sangh connections and his sometimes contrarian views on the economy.
For all practical purposes, Gurumurthy will lead the charge and push for drastic reforms in the RBI policies when the board meets next Monday. Satish Kashinath Marathe and Prof Sachin Chaturvedi, two others with strong links to the RSS will possibly only back Gurumurthy. The fourth independent director, Revathy Iyer was hitherto deputy CAG and is expected to strike a middle path on contentious issues. It is against this backdrop that Gurumurthy’s remarks on RBI and government differences should be seen. In fact, he has a point when he says that very few central banks around the world amassed reserves like the RBI. Keeping funds idling is not the right financial fundamental that a central bank should opt for. So, a working understanding between RBI, finance ministry nominees, industry representatives and independent directors on leveraging the reserves may have to be thrashed out. This does not necessarily mean that the reserves will have to be drained out to meet fiscal targets set by finance minister Arun Jaitley. Instead, intelligent leveraging of these funds should be made to hasten implementing large infrastructure projects, sustainable and high technology driven defence ventures, micro, small and medium enterprises (MSMEs) or strategic investments in space, nuclear power or atomic energy projects apart from creating oil buffers that could last for about three months.
Gurumurthy has flagged the banks-driven economic activity that largely happens in India vis-à-vis the American dispensation where markets drive the growth impulses. A nationwide debate with active participation from RBI on the larger economic model that Gurumurthy subscribes to is in order. On tackling non-performing assets (NPAs), the approach cannot be a one-time pill. Instead, gradual pumping in of funds by the government through re-capitalisation over years as recommended by Gurumurthy may be a better option. Given the kind of resources crunch that government faces, RBI may have to ease the pressure on one time settlement of all bad loans after having failed to discipline the banks and ward-off ‘political-corporate’ sweetheart deals.
While threadbare, open discussion of concerns aired by independent directors and government should be the starting point for discussions, Gurumurthy, who is a powerful voice in the establishment, should take care not to push the matter over the tipping point. He needs to bear in mind that while he has highly regarded skills in his chosen field, he might not be a virtuoso monetarist which is what is the role most suited for India’s central banker.