New Delhi: RBI Deputy Governor Viral V Acharya made a thinly veiled reference to government interference and loss of autonomy of the central bank in a lecture week. He supported his comments by making generous references to the disastrous consequences of a similar interference by the government of Argentina in the workings of its own central bank and also quoted liberally from comments made by former governors Rakesh Mohan and D V Subbarao.
Perhaps deliberately, Acharya omitted to mention what Raghuram Rajan, another former governor of RBI, had said on the subject but anyhow, Acharya managed to drive home his point and rile the government.
Acharya warned of the wrath of financial markets and ignition of an economic fire unless the respect of the central bank was restored. He made no bones about the fact that "sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a facade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output." He was obviously referring to the bad loan crisis which was exposed first by Rajan.
He rued the limitation of the RBI in “undertaking the full scope of actions against public sector banks (PSBs) – such as asset divestiture, replacement of management and Board, license revocation, and resolution actions such as mergers or sales –– all of which it can and does deploy effectively in case of private banks."
The deputy governor also ventured into the issue of how much should the central bank give the government from its profits amid rising concerns over the government “raiding” the RBI to rein in the runaway fiscal deficit. And then rounded off his lecture by once again expressing displeasure at the setting up of a new payments regulator.
Quite naturally, Acharya’s comments have caused a deep rumble in banking and bureaucratic circles. One must remember, though, that this is not the first time when top RBI functionaries have rued the lack of autonomy from the government of the day. Nor is it likely to be the last such instance.
Former RBI gov Subbarao once said, “I do hope the Finance Minister will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists". And Rajan quoted this comment by Subbarao in his book, adding “I would go a little further. The Reserve Bank cannot just exist, its ability to say 'No!' has to be protected.”
In the postscrpit to the same chapter, Rajan has added: “I am not the RBI governor any more. But the point in my speech in worth reiterating: there is a danger in keeping the position ill defined, because the constant effort of the bureaucracy is to whittle down its power.... the RBI risks becoming dangerously weakened as successive governments and finance ministers misunderstand its role. The RBI governor, as the technocrat with responsibility for the nation's economic risk management, is not simply another bureaucrat or regulator and efforts to belittle the position by bringing it into the bureaucratic hierarchy are misguided and do not serve the national interest. More clarity about the RBI role and a clearer assertion of its independence, would be in the nation's interest.”
Subbarao has revealed in his book how much pressure the UPA finance ministers P Chidambaram and Pranab Mukherjee put on him in the matter of interest rates. And Rajan’s skirmishes with the government are well known.
But ample past instances of the RBI and the government being at loggerheads in the past have not prevented naysayers from predicting turmoil in the markets this week due to the RBI’s foolhardiness in bringing out the current feud in the open. Nor have such people shied away from advising the central bank to have more “reserve” and quietly do the government’s bidding instead of picking up the gauntlet.
Had Acharya’s comments not been made just when they were, perhaps the resulting controversy would have blown over after a few days. But as it is, the government has been fighting the CBI fire, with the perception gaining ground that it has undermined the country’s top security agency.
So when the Congress waded in the RBI waters, it automatically clubbed the two instances. Its spokesperson termed RBI as “Restrict Banking in India” and raked up the preceding controversy over the Central Bureau of Investigation (CBI). Central to the Congress’ attack on the government was the perceived loss of credibility and autonomy of critical institutions under the Modi government.
This is the nub of the issue. The comments of Acharya may probably have not borne such minute scrutiny had they not come in the same week as the government facing a major public embarrassment over the goings on at the CBI. The perception, that institutions which safeguard the nation, its security and economy, are under threat, is gaining ground and this is what has kept RBI autonomy issue on the boil.
Besides, the friction between the RBI and the government has been rising since early this year anyway. Think back to the unravelling of the Nirav Modi scam and you would be forgiven for believing that the entire fault lay with the RBI, its weak oversight of PSU banks and monitoring systems.
Any mention of demonetisation and its consequences again brings the RBI back to mind, so cleverly has the blame been laid at its door for what was a purely government decision. The latest rub seems to be induction of a government nominee director on the RBI board who seems to be pushing for increased lending to a particular sector of loan seeking enterprises.
Governors past and present have exchanged words and more with the government of the day to protect their turf and will probably continue to do so in the future too. What remains to be seen is whether Patel (and his deputies) manage to do so while retaining their chairs. Another reshuffle at India’s central bank, as is being speculated, may not solve the myriad economic issues the country currently faces.
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