RBI vs govt: At 19 November board meet, S Gurumurthy’s economic theories and other pain points await Urjit Patel
Gurumurthy’s recent comments had challenged the central bank on multiple issues and some of his economic theories had surprised many.
Battle lines are drawn and fireworks are likely at the central bank’s board meet scheduled for 19 November. The meet is set in the backdrop of the biggest-ever turf war between the Reserve Bank of India (RBI) and the central government. The recent public spat between the two came to an end with the government issuing a statement assuring RBI’s autonomy. But the events that followed shows that the truce was temporary and the proverbial silence before a storm. The 18-member central board of the RBI has five members from the central bank including the governor and the rest are government nominees. At the 19 November board meeting, the RBI s will have a tough time to talk peace with the government nominees.
The contentious issues still exist. The signals are clear from the recent statements of Swaminathan Gurumurthy, the RBI’s board member who was recently appointed by the government. Gurumurthy has close associations with the BJP’s ideological parent Rashtriya Swayam Sevak Sangh (RSS) and has links with the rightwing body, Swadeshi Jagran Manch, which was instrumental in the recent ouster of Nachiket Mor, one of the RBI board members. Gurumurthy’s recent comments had challenged the central bank on multiple issues and some of his economic theories had surprised many. If they offer any clue, the following are the issues of contention that are likely to come up on the discussion table:
First, RBI’s approach of liquidity management had come under severe criticism from the government in the recent past. Gurumurthy believes that if the right to print currency is entrusted to the government and not the central bank, the ongoing liquidity issues could have been handled better.
"Government of India has given up the right to print rupee in 2002 so that it cannot print money to infuse liquidity," Gurumurthy said on Thursday delivering a lecture at an event organised by Vivekananda International Foundation in New Delhi.
Of course, all political administrations in the world would love the idea of printing currency on their own as per their requirement. But, if governments start to do so, the idea of central banks managing inflation will be a joke. Particularly, in the Indian context, where the central bank is bound by an Act to guard inflation targets, one wonders what logic has been taken into accounty by Gurumurthy when he made this statement. If Gurmurthy takes up this line of argument in the central board meeting, this can become an embarassing encounter.
Second, it is fairly certain that Viral Acharya, the deputy governor, who openly launched an attack on the government in the recent past, will come under the line of fire for his public outburst. Even in the government statement, which seemed to offer a truce during the recent public spat, there was an unmistakable sense of displeasure and warning when it said that it frequently consults with the RBI on important matters but never goes public with them. This was a clear message to the RBI that the organisation needs lessons on self-discipline. In the board meeting, Acharya will likely face the wrath of government nominees.
Third, yet another point of criticism from Gurumurthy is that RBI handled the NPA clean-up with over-aggression. This is what Gurmurthy said: NPA has been developing since 2009 and it peaked in 2014. At that time RBI did not say ‘you provide’ but in 2015 it said ‘you provide’. So, providing at one go is the problem. If they had said you provide over five years this wouldn’t have happened,” he said.
RBI’s actions on the NPA-front have curtailed the ability of the sector to lend, he complains. Here, Gurumurthy is right in saying that NPA clean-up should have started much earlier, something even former RBI governor, Raghuram Rajan, who had initiated the clean-up process had agreed. But, being a government nominee, Gurumurthy has likely scored a self-goal here.
The NPA cleanup on such scale would not have happened without big political backing from the Modi-government. Modi came to power in May 2014 and the RBI soon began the process of early identification of stressed assets. The high provisioning was necessary to punish the wrongdoers and reward the performers. The erstwhile UPA’s lack of willingness to take on defaulters is one of the key allegations by the BJP against the Congress party.
Also, Gurumurthy's argument for easier norms for weaker banks too may not go down well with the central bank's top brass, which has launched a major attack on bad loan-ridden banks restricting their lending operations through prompt corrective action (PCA) plans. Nearly a dozen state-run banks are under PCA now.
In the ongoing duel between the RBI and the government, ultimately the RBI will have to give in. It can only persuade the central government to lend it the desired autonomy in key functions. Technically, the RBI is not autonomous. The RBI Act makes the central bank answerable to the government. For instance, section 7 is a powerful tool for the government to override the RBI. But, this power works well in theory but in reality will bring chaos in the economy.
A well-functioning, independent central bank is a must for a democracy. If the government invokes section 7, it can cause much panic in the financial markets. That’s because the financial markets trust the central bank more than the political leadership. Speculations are still doing the rounds on governor Urjit Patel’s likely resignation if things go horribly wrong at the RBI board meet. One cannot rule out the possibility.
Inflation has remained above RBI's upper tolerance level of 6 per cent since January 2022. It ruled over 7 per cent in April, May and June. July saw a breather with inflation sliding to 6.7 per cent. Last month, inflation touched 7 per cent
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