India's Central Bank: What Lies Ahead? :: The Global ANALYST, January 2019
The Global ANALYST, January 2019
India’s Central Bank:
What Lies Ahead?
M G Warrier
“Having met with staunch criticisms for mass mismanagement of public money in the wake of the 2019 elections, the current government is valiantly trying to save its face. Invoking Section 7 is a saving grace for several reasons. It can earn the government a clean chit by validating its blaming of the RBI, and in so doing can build up political pressure on the central bank to dilute its regulatory policies in order to favour political clientele, and even stretch such pressure to siphon off the bank’s (internal) reserves over and above the surpluses transferable to the government, all for supporting its populist rhetoric.”
-Excerpted from Editorial, Economic & Political Weekly, November 3, 2018
The quote above sums up the media perception of the developments that led to the resignation of Urjit Patel as RBI Governor on December 10, 2018. I am not sure whether anyone who has been commenting on the developments in the Indian Economy will be able to make a balanced analysis of the current chaotic phase in the GOI-RBI relationship. As we have no constituency interests to protect, let us make a beginning. We will keep our options open to ‘take sides’ in the coming months as the drama progresses.
Reserve Bank of India, by design, is not meant to be subservient to Government of India. Those who drafted the Reserve Bank of India Act during the second quarter of last century were well aware of the conflict of interest between Fiscal and Monetary policies. Those who are watching the current media debate on relationship issues between GOI and RBI need to read again the Sections 7, 8 (see Box 2) and 58 of the Reserve Bank of India Act, 1934 which are about the management of RBI.
A media report captioned “RBI, govt spar over panel head” published in a financial newspaper in the first half of November 2018 covered the glaring disagreements between RBI and GOI on some of the issues which led media to speculate about the imminent exit of the then RBI Governor Urjit Patel and one/some of his deputies.
In reality, GOI and RBI had come out with two equally competent economists, namely Dr Bimal Jalan GOI nominee) and Dr Rakesh Mohan (RBI nominee) to chair the panel to review India’s central bank’s economic capital framework (ECF). My response was, prudence demanded inclusion of both the celebrity economists with Indian background in the ECF Panel, as their rich experience in RBI and GOI besides their association with global financial/research organizations would enable the panel to have informed deliberations. The possibility of Dr Jalan, considering his own political leanings, himself moving out in favour of allowing his former colleague Dr Rakesh Mohan to head the Panel was also not ruled out. Media suggestion was to allow both to co-chair the panel, which was also not a bad idea. I felt that both were mature and seasoned statesmen and would know how to conduct the deliberations keeping the national interest uppermost. In the circumstances, I exclude the possibility of this issue having triggered the abrupt exit of Urjit Patel.
RBI’s capital since inception remains static at Rs 50 million. Bank’s reserves (Contingency Fund + Asset Development Fund) depleted from a self-set target of 12 percent of total assets (which RBI almost touched in 2009) to a low of 7.05 percent of total assets as on June 30, 2018. The percentage was 9.2 in 2014 from which year RBI continuously transferred its entire surplus income to GOI till 2016 resulting in depletion of this percentage every year since then. Earlier GOI listens to the alarm, the better for the Indian economy. Ideally, the ECF Panel should first arrive at a decent figure to be recommended as RBI’s share capital (say, upwards of the equivalent of US $ 200 billion, which itself will be too low, considering the responsibilities of India’s central bank). Needless to emphasize, RBI would also need a reasonably higher level of ‘liquid’ reserves. Keeping all these in view, the ECF Panel when formed should also consider creation of a “Capital Protection Fund” (in addition to the reserves) to which annual transfers should be made from Bank’s income an amount arrived at based on the level of inflation during each year.
RBI accepts the challenge
Please see the personal note posted by Dr Urjit Patel at RBI’s website on December 10, 2018. Reports show that his resignation was accepted by GOI next day and new Governor Shaktikanta Das took charge on December 12, 2018 (see Box 1)
I would like to substitute ‘responding to call of conscience’ for ‘personal reasons’ in the brief statement issued by Urjit Patel immediately after stepping down as RBI Governor. And, the substituted words include ‘personal reasons’ some of which do not remain secret anymore. But, for those personal reasons, Patel would not have left the institution in the lurch. Real reasons are national and not personal. I will not elaborate today. Will just recall another incident, taking you back in India’s history to 1975.
Sankara Pillai had run Shanker’s Weekly for decades, almost single-handed. He closed down the Weekly with a ‘Souvenir’, last issue of the Weekly appearing in July 1975, that is within almost a month from the declaration of National Emergency. Shanker could have ‘compromised’ and continued to publish the Weekly. He said, ‘Weekly could have taken the Emergency in its stride’. He closed it down for ‘personal reasons’. And those reasons included avoiding embarrassment and uncertainties to certain individuals and families who were part of the Weekly. Those who are curious can Google search for articles in The Hindu on the subject.
Each individual is different. GOI’s choices to man the top positions in RBI beginning with Dr Raghuram Rajan as Governor have been non-controversial and excellent viewed from the angle of professional competence. It would be interesting to think how Dr Bimal Jalan or Dr Y V Reddy or Dr Rajan would have responded to the situation Urjit Patel faced in the third year of his governorship. Also, it is worth pondering over as to whether things would have been different if the position of RBI Governor was more secure. These thoughts I will leave here with a quote from my own article on the appointment of Dr Raghuram Rajan as Governor, RBI published in the September 2013 issue of this magazine. I said:
“…The only negative in the whole affair is, as on several occasions in the past, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as to whether the decision to appoint Rajan for 3 years was because of a casual/cut & paste’ from previous appointment ordersor because GOI thought, if friction between RBI and GOI persists, changing RBI Governor is a soft option. As someone in the media has already observed, the flipside is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have. Ideally, RBI Governor should have a tenure of 5 to 10 years…”
RBI will pass through this crisis sooner than all of us think. Thanks to the support the institution received from GOI from 1920’s (formative years) till today, there is an institution called Reserve Bank of India which will not succumb to injuries so soon. The signals from the press release issued by RBI after the Central Board meeting on December 14, 2018 and the media responses given by the new Governor Shaktikanta Das before and after the first board meeting he presided over are positive. He will start talking RBI’s language much faster than his IAS-predecessors.
RBI Act provisions on management of RBI
(Writer is a former central banker and author of the 2018 book “India’s Decade of Reforms”)