Time govt, RBI stop spat, work in harmony

The ongoing spat between Government of India and RBI has unfortunately spilled in the open in recent times, in spite of the fact that RBI is very much part of governance of the Country. Political twist has sought to be given to the issue when some people of ruling party wanted to embarrass the opposition for criticizing the government by saying that long ago, the first prime minister of the country Sh. Jawaharlal Nehru had clearly advised the then Governor RBI that, the RBI as an institution was autonomous within the government and that there was no concept of absolute autonomy. It only exposes the lack of appreciation of the working of the system by the people at helm of affairs today.

One has to understand and have faith in the fact that successful democracies work through institutions. It is immature on the part of a popularly elected government to scream at technocrats who have been appointed by the government to deliver on goals that are defined by either law or the monetary policy agreement. It is perhaps equally unfair on part of these technocrats to shout from rooftop that their autonomy was absolute and that it was being trampled. What is the use of trying to score debating points for both of them. The government of the day has to keep in mind that technocrats are not political opponents. One key challenge is to clarify roles, responsibilities and build accountability into the arrangement.

Unlike the constitutional bodies like the Election Commission, CAG, UPSC, Finance Commission, Attorney General etc., RBI is only a statutory body under an act of Parliament i.e. Reserve Bank of India Act 1934. RBI was originally a privately owned entity. It was nationalised in 1949.

It is interesting to note that the central banks in a large number of countries are also not creatures of constitutions and the instances of differences between the governments and central banks are not uncommon.

Such differences reflect robustness of democracy and respect for functional autonomy of the important statutory institution like a central bank, as long as the differences are settled amicably through dialogue and in the best interest of the economy and public interest. It is also important that the discussions, and ironing out of differences on various issues as well as finding the best middle path are always done out of the public and media glare.

In India, perhaps on nationalisation of RBI in 1949, it was felt that if a rare situation arose where the differences between government and RBI were not reconciled through discussions, there should be a way out.

For this, Section 7 of the RBI Act 1934, that gives the government the power to give instructions to the central bank in the public interest, after consulting the governor, which was not in the original law that established the RBI, was added after nationalization in 1949.

It is interesting to note that the RBI board at that time is said to have wanted a provision in the law that the government has to take responsibility for the consequences of any policy that was forced on the RBI through Section 7. The proposed clause was however not included in the section.

It is also pertinent to note that there has never been any occasion to invoke the provisions of the section 7 even once, either for consultations or for directions. Therefore, we are in an unprecedented situation where government has invoked the section for consultations. Questions are being asked as to why the situation has been made to deteriorate so much as to be forced to invoke the provision.

It is getting clearer that the failure of the present government to appreciate the need to safeguard autonomy of different entities like RBI, CBI, CVC, etc. and work smoothly with them.

It is agreed by one and all that on all issues concerning monetary related policies and banking related policies there should be a continuous dialogue between government and RBI with RBI having functional autonomy in taking decisions. However it is not at all uncommon for them to differ many times, on account of pursuit of their respective mandates. As said before this has happened many times with earlier finance ministers and governors of RBI which however, never led to a situation of invocation of powers of Sec 7 by the government.

The present team in RBI which accepted a fate accompli and swallowed the demonetisation pill along with the series of muddle headed follow up actions of the government without a whimper, has now stood up for its autonomy that surprised the government. In retaliation the government has apparently taken a rigid stand which the experts believe, is unreasonable and not in the long term interest of the Country’s economy. It is often repeated stand of blaming the predecessor government is no longer cutting ice with the general public.

The well known and widely discussed differences apparently are,

i. the disinclination of RBI to dilute the prompt corrective action(PCA) directive imposed upon the 11 public sector banks .

ii. the refusal of RBI to relax actions on some major power sector companies.

iii. the difference in perceptions about the reserves with RBI and right of the government to demand transfer them to the government as demanded.

In respect of the point i. regarding PCA on PSU banks, it may be recalled that as per the statistics, the PSU banks had aggregate NPAs of Rs 2.5 lakh crores in 2015 which has grown to nearly Rs10.00lakh crores by 2018, a fourfold increase which is alarming to say the least. The then Governor RBI is said to have submitted a list of top defaulting firms to be given to Estimates Committee of Parliament and had also submitted a letter explaining the position. The list contained names of those large corporate who have contributed significantly to the ballooning of NPAs, and have grown four fold in the next three years. It is said that the government has been dragging its feet in providing the list to the Estimates Committee giving rise to speculation that it may be wanting to protect some select wilful defaulters. The issue of making public, names of large wilful defaulters has been in news and the Information Commissioner has even expressed extreme displeasure at RBI blocking the information. It is rather painful to see small farmers and small borrowers being treated so harshly by the banks when names of big defaulters is being so strictly guarded from public gaze.

The government has asked RBI to give relaxations in PCA to the 11 PSU banks so that they could lend to MSMEs which are being starved of credit on account of liquidity crunch in the system. RBI’s view is that PCA is ensuring that the 11 sick PSU banks are being monitored well in the ICU and their response is satisfactory. Any dilution at this stage will adversely affect their recovery. RBI is also unhappy about the fact that as owners of PSU banks, the government, while asking for relaxation in PCA, has not infused capital as required and as announced by it.

This also has connection with point number ii. where government wants the RBI to permit banks to give relaxations to power sector companies which are in deep distress and may be taken to bankruptcy. Outstanding of these large corporate entities are said to form a significant part of the NPAs of PSU banks. It is also said that due to their influence and proximity to power centres, these corporate are said to be pressurising RBI through government for relaxation. Unless the government reveals the names of the corporate involved and makes its position clear, such suspicions will not die down.

The third point regarding transfer of surplus of RBI to government is perhaps easily solvable by constitution of an independent committee which could go into the issue in detail and recommend appropriate amendment in RBI Act that would completely eliminate the source of dispute between RBI and government. It is to be understood that RBI in itself is a part of government and the reserves kept with it only creates a better buffer for the government.

Being on the issue of government utilising the surplus, it is perhaps not out of place to state that nearly 30% of banks working resources are impounded by way of investments in government securities whose market value fluctuates with interest rates, inflation etc. The banks then have to mark the investments to market and provide for depreciation. Even cooperative banks, which cater to the financial needs of small man, are not spared. The point is that having used so much of banking resources, the government should not eye at all the reserves that the central bank has and should be reasonable in working out a formula which is comfortable to RBI.

The insistence of government that RBI should place at its disposal substantial portion of the Rs3.6lakh crores reserve is seen as a ploy for cover up against the slippage in fiscal deficit percentage target particularly in the election year and is looked upon as an unhealthy precedent, which will also expose the Country in the event of violent and unexpected fluctuations in currency, gold, crude and also any meltdown in global economies.

Finally if at all the government is bent upon giving directions to RBI under section 7, it should be ready to incorporate a clause that was suggested in 1949 which clarifies accountability on action forced upon RBI. Invoking of Section7 will be seen as admission of failure on part of government to work harmoniously with important institutions in the system and appreciate their sensitivities. There is need for everyone to work towards protecting long-term interests of the country’s economy.

(The writer, a former minister, is a Congress leader)