By Seema Khan
Institutional crises that has gripped the democratic institutions under the BJP Government, has been systematically destroying every democratic institution such as Judiciary, CBI, the parliament, by passing the bills as money bills, educational institution etc., has made the RBI its latest target.
Mr. Viral Acharya, the deputy governor of RBI, in his lecture expressed the fear that the government is trying to impose section 7 of the RBI act, which has never been done before by any previous governments.
Section 7 states that Reserve Bank of India is an autonomous body but under the control of the government. Acharya said that if this is done RBI will no longer be an independent agency, and it will become very difficult to run RBI. He said the RBI has long term goals while the government has short term role. He used the analogy of cricket match; that the government plays 20:20 match and RBI plays test match.
The tussle between the government and RBI has come at a wrong time. There are severe economic crises in India and the world. Economic and trade policies of Donald Trump are affecting the Indian markets. Then there is an economic crises in the Middle East. Indian Rupee is falling and crude oil prices are increasing.
On the domestic front; there is liquidity crunch in the market due to poor condition of 11 state owned banks because of raising Non-performing assets (NPAS) effecting the economic growth. On the other hand; micro, small and medium enterprises (MSME) are not able to get the loan since RBI imposed a prompt corrective action.
The compulsion behind the government trying to impose Section 7 is political. Elections are very close and there is a fiscal deficit that has reached to its limits. Government does not want it to become news, and an issue before the elections. So RBI should lend some money to the government from its reserves, make flexibility in corrective actions, and lend money to business men, so that economy picks up. Government thinks that it will check the rupee exchange rate, which was a major issue before 2014 elections, and an embarrassment for the previous government.
On the other hand MSME are not able to get the lone because of the corrective action imposed by the RBI, on weak government banks (MSME are the core vote bank of BJP). The government wants RBI to relax this corrective action, so that the funds can be made available, and loans given to MSME.
NBFC is also in crises. It has no money because IL & FS (Infra structure & financing company) is not releasing funds since it is on the verge of default. All these situation, mainly due to a poor insight and bad decisions of the current government, is leading to a liquidity crunch in the market.
To make the situation worst, most of the power companies are owned by close friends of Mr. Modi. The Ambanis, Adani, Tata’s are all in deep crises. RBI showed the way to NCLT or to send them to NCLT. The government wrote to RBI requesting not to do this, and to give some relaxation to these power companies, and give them some time. It can be seen that corporate interest are involved here.
But the main issue here is the liquidity crunch in the market, and the government wants RBI to release the funds.
The RBI on the other hand says it should have a total control over the monetary policy and the government over economic policy, and a balance has to be maintained. RBI cannot be dictated by the government.
Negative effects of over spending should be taken care by the monetary policy.
RBI has raised concerns that the government has got into the mess due to its own policies. Government has control over public sector banks. It’s governments role to keep them under control against indiscriminate lending.
The government has clashed with RBI at a wrong time. RBI has a good record in its performance. If the government imposes section7, and if the governor reacts to it as a non-confidence motion against him and leaves before completing his term, it will send a wrong message, not only to Indian economy but also to the world economy.
If Dr. Urjit Patel leaves in the middle of his term, it will send a wrong signal, not only to the India economists, investors and businessmen, but also to the world. And the adverse affects to Indian economy could last for years, and may decades to rebuild the confidence.
Sensing the mood of the market, the government has tried to do some damage control by saying that the independence of RBI will be maintained, but in the interest of the people, if the government has to take some action, it will do so in consultation with RBI. This, however, does not make it clear that the government will not exercise section 7 of RBI act. It may not use section 7 but still pressurise RBI to release the money, and to submit to its dictates.
Urjit Patel was appointed by BJP government but he is not willing to submit its whims, and is trying to protect the RBI and its integrity.
Question that crops to educated minds is why so many unwise and unprecedented actions by the government in last couple of years? It was for the first time that a director of RBI was sacked. It was for the first time that 2 new directors are known more for their ideology rather than competence, and then the issue of RBI section 7.
In Supreme Court, it was a clash between 2 judges, in CBI there was clash between 2 directors. But in RBI both directors are together as Mr. Viral Acharya, in his lecture, said that what he was saying had the backing of Mr. Urjit Patel.
It shows a lack of acumen on the part of the government to run the country that is destroying democratic institutions.
Government and RBI has been locking horns on interest rates and other matters too. February 12th circular on Punjab National Bank crises issue, dividend payment problem, power sector NPAS which the government wants RBI to relax and bail out these companies, directors on RBI board want to shift neutrality, have been creating problems.
RBI cannot bail the government and pay the dividend as demanded by the government. RBI has suffered huge losses because of printing of new notes and calibration of new teller machines. These losses were not due to their own mistakes, but because of unwise decisions by the government.
Now the same government, taking similar decisions, wants RBI to part its reserves. Mr. Urjit Patel has given a clear indication that you can’t direct RBI on how much it can give by dividend. The system is made up of checks and balances, and RBI keeps the savings for rainy day, and only the dividends are given to the government. But the government’s asking to release the reserved capital will prove to be a disaster for the country.
