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.
Box
1
RBI
accepts the challenge
I
Statement by Governor
On account of
personal reasons, I have decided to step down from my current position
effective immediately. It has been my privilege and honour to serve in the
Reserve Bank of India in various capacities over the years. The support and
hard work of RBI staff, officers and management has been the proximate driver
of the Bank’s considerable accomplishments in recent years. I take this
opportunity to express gratitude to my colleagues and Directors of the RBI
Central Board, and wish them all the best for the future.
Urjit R. Patel
10th
December 2018
II
RBI Press Release : 2018-2019/1362
December 12, 2018
Shri Shaktikanta Das appointed as Governor of RBI
Shri
Shaktikanta Das, IAS Retd., former Secretary, Department of Revenue and
Department of Economic Affairs, Ministry of Finance, Government of India
assumed charge as the 25th Governor of the Reserve Bank of India effective
December 12, 2018. Immediately prior to his current assignment, he was acting
as Member, 15th Finance Commission and G20 Sherpa of India. Shri Shaktikanta
Das has vast experience in various areas of governance in the last 38 years.
Shri Das has held important positions in the Central and State Governments in
the areas of Finance, Taxation, Industries, Infrastructure, etc. During his
long tenure in the Ministry of Finance, Government of India, he was directly
associated with the preparation of as many as 8 Union Budgets. Shri Das has
also served as India’s Alternate Governor in the World Bank, Asian Development
Bank (ADB), New Development Bank (NDB) and Asian Infrastructure Investment Bank
(AIIB). He has represented India in international fora like the IMF, G20,
BRICS, SAARC, etc. Shri Shaktikanta Das is a postgraduate from St. Stephen’s
College, Delhi University.
Jose J. Kattoor
Chief General Manager
III
RBI Central Board meets
in Mumbai
The Reserve Bank of India’s (RBI) Central
Board met today in Mumbai under the Chairmanship of Shri Shaktikanta Das,
Governor, Reserve Bank of India. The Central Board placed on record its
appreciation of the valuable services rendered by Dr. Urjit R. Patel during his
tenure as Governor and Deputy Governor of the Bank. The Board deliberated on
the Governance Framework of the Reserve Bank and it was decided that the matter
required further examination. The Board reviewed, inter alia, the current
economic situation, global and domestic challenges, matters relating to
liquidity and credit delivery to the economy, and issues related to currency
management and financial literacy. The draft report on Trend and Progress of
Banking in India (2017-18) was also discussed.
Jose J. Kattoor
Chief General Manager
Press Release : 2018-2019/1375
Source: RBI
Website
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.
Box 2
RBI Act provisions on management of
RBI
Reserve Bank of India Act,
1934
7. Management
(1) The Central Government may
from time to time give such directions to the Bank as it may, after
consultation with the Governor of the Bank, consider necessary in the public
interests.
(2) Subject to any such
directions, the general superintendence and direction of the affairs and
business of the Bank shall be entrusted to a Central Board of Directors which
may exercise all powers and do all acts and things which may be exercised or
done by the Bank.
(3) Save as otherwise provided
in regulations made by the Central Board, the Governor and in his absence the
Deputy Governor nominated by him in his behalf, shall also have powers of
general superintendence and direction of the affairs and the business of the
Bank, and may exercise all powers and do all acts and things which may be
exercised or done by the Bank.
8.
Composition of the Central Board, and term of office of directors
(1) The Central Board shall
consist of the following Directors, namely:-
(a) a Governor and not more
than four Deputy Governors to be appointed by the Central Government;
(b) four Directors to be
nominated by the Central Government, one from each of the four Local Boards as
constituted by section 9;
(c) ten Directors to be
nominated by the Central Government; and
(d) one Government
official to be nominated by the Central Government.
(2) The Governor and Deputy
Governors shall devote their whole time to the affairs of the Bank, and shall
receive such salaries and allowances as may be determined by the Central Board,
with the approval of the Central Government:
PROVIDED that
the Central Board may, if in its opinion it is necessary in the public interest
so to do, permit the Governor or a Deputy Governor to undertake, at the request
of the Central Government or any State Government, such part-time honorary
work, whether related to the purposes of this Act or not, as is not likely to
interfere with his duties as Governor or Deputy Governor, as the case may be:
6[PROVIDED
FURTHER that the Central Government may, in consultation with the
Bank, appoint a Deputy Governor as the Chairman of the National Bank, on such
terms and conditions as that Government may specify.]
(3) A Deputy Governor and the
Director nominated under clause (d) of sub-section (1) may attend any meeting
of the Central Board and take part in its deliberations but shall not be
entitled to vote:
PROVIDED that
when the Governor is, for any reason, unable to attend any such meeting, a
Deputy Governor authorized by him in this behalf in writing may vote for him at
that meeting.
(4) The Governor and a Deputy
Governor shall hold office for such term not exceeding five years as the
Central Government may fix when appointing them, and shall be eligible for
re-appointment.
A Director nominated under
clause (c) of sub-section (1) shall hold office for a period of four years and
thereafter until his successor shall have been nominated.
A Director nominated under
clause (d) of sub-section (1) shall hold office during the pleasure of the
Central Government.
(5) No act or proceeding of the
Board shall be questioned on the ground merely of the existence of any vacancy
in, or any defect in the constitution, of the board.
(6) 7[***]
(7) A retiring director shall
be eligible for re-nomination.
End Note: Sections 7, 8 and 58 of the RBI Act, 1934broadly define
the contours of RBI management.
***************
*(Submitted version)
(Writer is a former central banker and
author of the 2018 book “India’s Decade of Reforms”)
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