Wednesday, July 8, 2020
Home Economy and Finance Much ado about nothing: Demystifying the needless hue and cry over the RBI

Much ado about nothing: Demystifying the needless hue and cry over the RBI

The RBI is accountable to the government of the day and to parliament who in turn are directly answerable to the people. It is therefore understandable that Government will try to influence as it should but it didn’t warrant any crisis on the part of Governor nor any extreme decisions.

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“The only function of economic forecasting is to make astrology look respectable,” remarked the legendary Economist John Kenneth Galbraith.

An impartial observer looking at the current whipped up crisis by the Congress party after the resignation of RBI Governor will probably quote it as – The only function of Congress hue and cry over RBI is to make their former caged parrot CBI look respectable. But then, it is worse because Congress is not just crying hoarse over the economy but drawing foolish parallels with populist moves aimed at upcoming elections.

It has been typical of the Congress party in recent times to engage in an endless series of misinformation campaign and they will probably be re-energised after their recent success in some states. Probably the final cue to go ahead full force with misinformation would have been the Supreme Court judgement which cleared Government of any false allegations on Rafale Deal. They had to have a subject to misinform people about when providence handed it over on a platter in the form of Governor’s resignation. However, it is irresponsible on the part of Congress to raise baseless allegations and reduce the confidence a sacrosanct institution like RBI enjoys particularly because it has a direct bearing on the capital markets and how the global investors view the economy.

The supposed panic mode of BJP before elections is just too foolish a theory and goes on to prove that Congress probably doesn’t have an economist worth his salt and draws a preposterous conclusion. It is well studied that even monetary policy let alone other things won’t influence the economy in such a short span of 3-6 months. It will take as much as six months to a year for the complete effect of monetary policy. Whoever in Congress thought of RBI autonomy and role in influencing election outcome doesn’t have enough knowledge to even make credible sounding arguments.

Secondly, the invocation of Section 7 of the RBI Act has been brought up which again is completely untrue. RBI is an independent body and even invocation of Section 7 doesn’t tantamount to breach of its independence. The RBI is one of the most important institutions which works independently but is inter-dependent with the Government on matters of economy. Interdependence of various financial institutions, bodies, regulators and policymakers can’t be construed as impinging on the autonomy.  According to the RBI Act’s Section 7 (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 interest”. This supposed issuance of a letter to RBI under Section 7 needs to be seen in the light of recent judgement by Allahabad high court in a case filed by Independent Power Producers Association of India challenging RBI’s 12th February circular. The high court in August said the government could issue directions to RBI under Section 7 of RBI Act. Even if we were to assume that this Section was invoked, it was clear that it wasn’t illegal but deemed in the larger public interest. More importantly, the invocation of this section would have been binding on RBI and Government could have forced it with legal recourse rather than just meek letters. It is clear that the Government never intended to do that and also that it would clear the legal barriers if it did. No attempt at curbing the autonomy of RBI can be imputed to the motive even in the latter case.

Unlike the caged parrot which CBI was in the UPA regime, the institutions in the Modi regime have enjoyed remarkable autonomy which the Congress wouldn’t like anyone to believe. To be fair, friction existed between RBI & Government in this regime as well as previous. This difference of opinion on the way ahead for the Indian economy is not just healthy but also a necessity. There have been times when Y.V Reddy exceeded his brief and stepped into Finance Minister’s domain to suggest a tax on foreign inflows. Then there were times when Subbarao was such an independent man in himself with regards to monetary policy that Chidambaram had to state that he will “walk alone” with regards to the growth in Indian economy. Such differences are bound to occur and should occur which is why RBI as an independent body was required in the first place. The famous case of frustrated Harry Truman demanding a one-handed economist might be the perfect anecdote, to sum up the situation.

I personally view Economics as something which should focus solely on the greater good of the greatest number of its constituents while also being acutely aware of it being a probable social science rather than perfect physical science. The matters of opinion can vary and it is essential that the same not be held up against the Government.

The Government by appointing Shaktikanta Das has brought in a fresh perspective rather than a strictly academic perspective that the previous two governors offered. Back in those days, Nobody accused Chidambaram of high handedness or pressure tactics when he chose to walk alone for the growth trajectory. The current Modi dispensation should not be accused of such false allegations either. Shaktikanta Das is an able bureaucrat who has time and again presided over major course corrections in the Indian economy as well as important decisions like demonetization being Finance Secretary.

The RBI will surely see a course correction in policy matters and greater synchronicity with the Government under him with independence and autonomy which RBI is known for. It is probably time for some hard decisions to aim for a much higher GDP growth even though we are still one of the fastest growing economies.

Thirdly, the issue of NBFC and restructuring of loans of Micro Small and Medium Enterprises in the aftermath of IL&FS default have been a sore point of disagreement for the obvious reasons. The IL&FS crisis has taken a heavy toll on the Indian economy as funding tap to non-banking finance firms abruptly closed down, in turn, forcing them to deny even sanctioned loans to infra as well as small and medium enterprises. It has a direct bearing on the long-term growth and not necessarily on elections which are just months away. It is true that RBI should be commended for its principled stand that greater reliance on equity and long-term finance be used for funding long-term assets rather than short-term papers.

The lower marginal cost of funding is definitely a myopic strategy which needs to change over the long haul. However, it is nobody’s case that RBI had to take measures rather than settle for a low-inflation economy as the MSME’s suffer on account of this crisis. All said and done, the inflation target followed by MPC is approved by the government and by parliament before it can be implemented. The RBI is accountable to the government of the day and to parliament who in turn are directly answerable to the people. It is therefore understandable that Government will try to influence as it should but it didn’t warrant any crisis on the part of Governor nor any extreme decisions.

Lastly and most importantly, reports of supposed “raiding” of RBI reserves which have taken an emotional overturn in certain circles smacks of ignorance. There are media reports of government wanting the RBI to part with a third of its staggering 9.59 lakh crore reserves. What is not being reported adequately is the overall agreement even in conflicting point of views that RBI has been massively over-capitalised at 28% compared to the global norm of 14%. The Ex-CEA Arvind Subramaniam admitted it that much when he suggested that the same be used for the financial system rather than towards government. The Ex-Governor Urjit Patel probably put a much simpler response to the parliamentary panel that it would be necessary to keep AAA Rating.

However, it is not as simple as what Urjit Patel put it. A statement by James McCormack MD Fitch ratings in an Economic times interview that RBI reserve transfer won’t affect rating nor is it unusual for a central bank to transfer part of its reserves to fiscal accounts makes it clear. I am sure other rating agencies agree on the soundness of his argument. These arguments falling flat and some tough questions by the parliamentary panel probably resulted in an emotional reaction by the Governor. The one thing which all including the Governor would agree on is that no one can accuse the Modi government of either bulldozing the RBI to attempt something which is not in the interest of the nation nor try populist moves in just three months.

Nothing justifies this misinformation campaign attempt at political point scoring even though there is no credible point which Congress can harp on to while making those claims. In the process, they are just harming the prospects for the Indian economy by making the global investors lose confidence. Remarkably their efforts have failed miserably as there has been no downward spiral in Nifty as predicted which more or less proves where the informed investor community stands on the RBI issue and its autonomy. Congress can just take solace from the fact that they have got one more issue to peddle lies after the Rafale deal got a clean chit from the highest court of the land. A new lie is always refreshing for their spokespersons like Sanjay Jha who are going to town over it.

(The author, Shweta Shalini, is a BJP Spokesperson, Advisor to CM of Maharashtra and Executive Director of Maharashtra Village Social Transformation Foundation (VSTF), an initiative of Govt of Maharashtra)

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