Recently Rahul Gandhi accused the Narendra Modi led Government of interfering with the autonomy of the Reserve Bank of India (RBI). This added chorus to the various statements made by the opposition parties on similar lines. The allegations range from pressure by the Government on RBI to accept “demonetisation advice” to “non-independent decision making” of the Board of Directors of the RBI.
Going further, Rahul Gandhi even went on to claim that it was the Congress which “strengthened” RBI as an institution and it was PM Modi who “murdered” the “soul” of the RBI.
However, facts are just the opposite.
In 2011, the then UPA government had appointed the Financial Sector Legislative Reforms Commission (FSLRC), which submitted its report (pdf link) in March 2013. The Commission recommended trimming the powers of the RBI. Instead of “regulatory autonomy”, recommendations included vesting the government with more powers over the financial sector.
On the issue of autonomy and independence of the RBI, two important suggestions of the Commission need to be analysed.
Firstly, FSLRC recommended that the public debt management should be handled by an independent body and it should be taken out of the purview of the RBI. It is important to remind Rahul Gandhi and the former Prime Minister Manmohan Singh that it was the Congress party that led the bank nationalisation; it was their socialistic policies that caused massive fiscal deficits. These policies, which continued for decades, gave us massive public debt. All the banks were forced to take these as a part of their liquidity ratios. The UPA era further saw jobless growth and high public debt. Meddling with RBI’s powers to manage this debt in such a scenario was a direct attack on the independence of the RBI.
Secondly, FSLRC recommended appointment of a Committee to dictate the monetary policy. The Constitution of the Committee would have made the RBI governor one among several others. Majority of the members in the committee were proposed to be appointed by the Government of the day. This recommendation disregarded a clear conflict of interest, as the government is the biggest borrower in the market. The Committee would be driven by short term political gains than short/long term economic interests of the nation.
Do these recommendations not “murder” the “soul” of the RBI? It should be noted that the UPA led government did not reject any of the recommendations by the commission.
Not just that, forming FSLRC itself was seen as an act of trimming RBI’s powers because the UPA government and the central bank were often at loggerheads over interest rates during 2008-2013. This is documented in detail in the book ‘Who Moved My Interest Rates’ authored by the former RBI governor D Subbarao, where he says in no unclear terms that the UPA government had overstepped into the RBI’s turf.
And now Congress party leaders are going on claiming as if the RBI was a free bird and a respected autonomous institution before the Modi government took over.
Let me make it clear that the hypocrisy of the Congress party and the doublespeak by its leaders doesn’t absolve the current Modi government of its responsibilities. After May 2014, the new government should have setup a fresh committee to advise on the role of RBI and other financial system regulators.
However, they continued to work on the 2013 recommendations. Going a step further, the Finance Ministry released the Indian Financial Code (IFC) in 2015 for public comments. It proposed the formation of a Monetary Policy Committee (MPC) with four out of seven members being appointed from the government’s side with no veto power to the RBI governor on any decision taken by the MPC. It attracted negative comments. What the current government needs to do is to come up with reforms in this sector too, as they had done by bringing changes to the SARFEASI Act, etc.
To conclude, with a little politics, this is another Jallikattu type controversy. The mess was created during the UPA regime with active involvement of Congress party leaders, but the BJP has to carry the burden and blame, for they neither communicated successfully nor acted quickly enough.