ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Government versus RBI

The government’s invocation of Section 7 signals splits in the neo-liberal camp over political agency.

The tug of war for functional autonomy between the central bank and the government of the day is not uncommon in this country. But, the recent spat has assumed unprecedented proportions amidst reports of the National Democratic Alliance government allegedly invoking Section 7 of the Reserve Bank of India (RBI) Act, 1934 in seeking the central bank’s views on issues ranging from liquidity/lending to the non-banking financial corporations (NBFCs), dilution of the Prompt Corrective Actions (PCAs) for three out of the 11 weak public sector banks (PSBs), to RBI’s formulae for calculating its reserves and consequent surplus transfer to the government. Though the statement issued by the Ministry of Finance has made no references to Section 7, there is much hue and cry within the RBI itself about the government’s stance on these issues being seen as impinging on the institution’s autonomy and undermining the authority of its governor.

So, why this ado about Section 7? Given that it provides the central government the power to direct the RBI from time to time (though in consultation with its governor) on matters of public interest, there is growing concern about the already-strained efficiency of the banking institutions. And, rightly so in view of the ongoing banking sector crisis that has shown how state intrusion has impinged on the asset positions of PSBs, be it by encouraging them to lend indiscriminately in the name of infrastructure financing, or give bad loans to big businesses/corporates, which comprise over three-quarters of their non-performing assets (NPA). However, to do so the state never needed Section 7. Just by exercising its shareholder’s rights it could influence political appointments of senior banking officials who would align with the government of the day and contravene the RBI’s regulatory framework. 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 surplus transferable to the government, all for supporting its populist rhetoric.

But, what begets the sudden paranoid reactions from the RBI’s top officials regarding the central bank’s “autonomy,” when it has been proved time and again that such autonomy is only notional? Not to mention the overused case of demonetisation, recall how the bank had yielded to the government’s pressures and transferred almost all of its income to the centre as “surplus” between financial years (FY) 2014 and 2016, which led to no transfers to its own contingency and asset development funds during this period, and again in FY 2018 how it resorted to a “staggered surplus distribution policy” to mitigate the cyclicality in its economic capital levels (caused by the volatility of market forces) that resulted in an escalation of the surplus transfer by 63% from that in FY 2017. Such instances, along with the irrefutable fact that the current banking crises snowballed over time, make it hard to believe that the RBI officials and the government(s) in power have not been in connivance on key banking policies and subsequent fallouts. In fact, members of the Central Board of Directors, the apex administrative body of the RBI, are political appointees/nominees as per Section 8(4) of the RBI Act, 1934. These include both the governor and the deputy governors of the bank whose tenure, removal, and reappointment are at the discretion of the central government.

The politics built into the governance mechanism of the central bank ensures that it is obligated to operate by the legitimacy of political populism, rather than economic efficiency, thereby making “absolute” autonomy elusive. Under neo-liberalism, banking systems are tacit partnerships between governments and those private actors who are politically crucial. Big businesses/corporates assume political worth by being major benefactors of political parties, even if they are defaulting debtors of the banks. However, to distribute losses in the event of bank failure, governments also need the political support of depositors, who largely constitute the vote banks. Governments resort to lawmaking to signal their good intent to the vote banks. Simultaneously, the rules for enforcing such laws are twisted in the interest of the benefactors. Herein an independent regulator/central bank is rendered a mere statutory requirement for endorsing the state’s political agency.

But, in the changing regulatory landscape of the global financial market, the RBI is also under duress for reinstating its supervisory image, smeared by issues like declining profitability, weak earnings and poor investor sentiment, notwithstanding that the necessary policies for balance-sheet enhancement and funding resilience can be at loggerheads with the government’s electoral strategies. In the mud-slinging between the finance ministry and the official directors of the RBI, such conflict of partisan interests is discernible, with Finance Minister Arun Jaitley reckoning the role of “public interest,” and RBI Deputy Governor Viral Acharya that of the “wrath of financial markets” in RBI’s functioning. As the government stoops to reproaching the RBI to protect its own turf, RBI officials play the “autonomy” card to wash their hands of the banking sector delinquencies.

Updated On : 12th Nov, 2018

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