Fallen into Folie de Grandeur

The recent spat between the Reserve Bank of India (RBI) and the government has opened up a Pandora’s box of regressive macro policies, disadvantageous not only for the working of the financial system, but for the national economy in general. A dissection of the controversial public lecture of the bank’s Deputy Governor, Viral Acharya, would reveal that claims of the RBI technocrats taking the long view of the country’s economy and the autonomy of the central bank meaning independence from an overarching reach of the state, are both based on weak foundations. First, it is widely recognised how the RBI is overwhelmingly concerned with the short-term inflation issues, frequently neglecting long-term developmental concerns. Second, the concept of “independence/autonomy” as promulgated by the bank appears censored, with an overemphasis on the independence only from the state, but not the markets and the corporates (or “wrath of the markets” as the deputy governor puts it) that continue being the binding factors for economic decision-making. Independence, of course, does not mean absolute independence insofar as social considerations are concerned.

It cannot be dismissed that, with the ascendance of bureaucratic influences, the RBI has perpetually failed to ensure financial inclusion. Socially beneficial banking programmes, such as lending to the priority sectors and weaker sections of society, have been implemented rather perfunctorily, without proper social audit. In fact, the RBI’s adherence to a neoclassical macro policy framework since the early 1990s has led to fiscal consolidation that is predominated by public expenditure compression and reductions in direct tax rates, resulting in the shrinking of social/developmental expenditures and, subsequently, growing inequalities, particularly in urban areas. It is hard to believe that such aggressive fiscal consolidation could find a place in the government statutes without the RBI’s bidding: both the Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) and the Monetary Policy Framework Agreement (MPFA) were not only signed between the Government of India and the RBI, but also embedded in an amendment to the RBI Act. This resulted in the creation of India’s global image as an under-taxing and underspending nation, accompanied by the existence of very low bank credit to gross domestic product (GDP) ratio relative to comparable countries. This image will get further reinforced once the central government’s debt to GDP ratio is brought down to 40% by 2024–25, following the N K Singh Committee recommendations. For the current ruling dispensation, such aggressive fiscal consolidation is largely within its ideological position of “minimum government and maximum governance.”