Government, RBI must work together, end turf war

The ostentatious turf battle between the Union finance ministry and the Reserve Bank of India is not the real issue. An independent RBI lends credibility to any rules-based market economy. The finance ministry and the RBI are not adversaries, not rivals. The RBI is not exactly a watchdog. It’s one of the key players that manages India’s money supply and monetary policy.

In the ongoing tiff between the finance ministry and the central bank, the finance ministry is just being churlish in asserting its right to regulate the RBI. It is a right that has never been in question. The government can also claim the reserves that the RBI is holding. A ministry official has denied that the government is looking to put its hand into the till. It is, however, evident from the statements of finance minister Arun Jaitley and his top officials that the RBI was not being helpful in pushing the laggard economy into a brisk growth mode. RBI governor Urjit Patel had wryly and rightly observed that it wasn’t the job of the country’s central bank to manage the economy. So the real bone of contention is that the RBI is not cooperating with the government in giving the economy a helping hand. Perhaps there is justification in the finance ministry’s grouse. But the ministry and the government will have to confess that the economy is not on track, and the government would want to put the central bank 
into service in facilitating easier credit flow and friendly interest rates. The government is looking for ways of kickstarting the economy. This implies that the government’s other policy measures have failed.

An angry Mr Jaitley wanted to know why the RBI had failed in its oversight duty of checking the increasing non-performing assets of retail banks. But the RBI is not the babysitter of retail banks. The scheduled banks are expected to display financial prudence on their own as responsible corporate entities. Of course, there is the bureaucratic ritual of RBI inspections of banks, which should not be there in the first place. A bank that goes into the red should shut shop. The salvaging of troubled players is justified only on the basis of the too-big-to-fail criterion, which had come into play in the 2008 sub-prime crisis in the United States.

As India still reels under the socialist module of controlling economic activities, which the present government perpetuates, the public sector banks are pushed and prodded to finance government schemes, whether it be infrastructure projects, agriculture loans and loan waivers, start-up ventures, et al. Somewhere this government intervention in the economy is running into the dead wall of failed policy, failed business ventures like the collapse of the Infrastructure Leasing and Financial Services Ltd (IL&FS). It is natural that the government wants the RBI to play the midwife to non-banking financial companies (NBFCs) in easing their liquidity crunch. But it is not right for the government in the long term to manipulate the RBI or scheduled banks or NBFCs to ignore the norms of fiscal prudence, even it means a localised and temporary liquidity squeeze. The political compulsions of an election-bound government are understandable, but it does not cover up the gaping holes in a stuttering economy.

Despite the experts’ diagnosis that macro-fundamentals were stable and the economy can withstand turbulence, there is an overwhelming apprehension that there is a sharp turn ahead and that it could spell danger in a big way. There are the dire warnings that the global economy is heading towards another big crisis of the 2008 kind. That could rock the Indian economy and it would have political repercussions. And this is sure to deflate the hyperbolical claims of Prime Minister Narendra Modi about the achievements of his government in the past four-and-a-half years. The opening of 33 crore new bank accounts will pale before the fact that there is not enough credit circulation in the system.

It is in sheer desperation then that the Modi government is looking for the proverbial scapegoats. The RBI seems to be a good potential candidate. The failures of the government on the economic front are now being sought to be blamed on the central bank. The Modi government is not alone in looking for alibis. Former finance minister P. Chidambaram too was quite cross with the RBI and its governors, Duvvuri Subbarao and Raghuram Rajan, for not tweaking interest rates to stimulate the economy, but the Congress-led UPA government of Prime Minister Manmohan Singh refrained from faulting the RBI for the woes of the economy.

The Modi government-nominated RBI director S. Gurumurthy’s argument that the Indian economy is bank-driven like that of Japan and not market-driven like the United States is quite true. But a bank-driven system is the wrong model. It points to an economy that is governed, not at all the right thing for a market economy. India is really a market-driven economy, with its huge domestic market of hundreds of millions of consumers. The government should stop meddling with it as it did through demonetisation. The problem then is not the RBI but the Modi government’s warped economic thinking.

It may be too late for the government to make a course correction of any kind. It appears that the fiscal deficit is at uncomfortable levels as the government has been spending on infrastructure projects to keep the economy humming. The number of those filing tax returns may have doubled after demonetisation, but it has not really translated into tax buoyancy. The reason is quite simple. The GDP growth rate has been modest in the past four years, so tax collections cannot be but modest as well. There has been no windfall accruals through spectrum auction. Disinvestment has not fetched anything. The failure to find a strategic buyer for Air India speaks for itself. The government is really on a sticky wicket. Some of it is due to its own ineptness, and some due to global economic vagaries beyond its control. It’s not surprising that the claims of Prime Minister Modi and Mr Jaitley on the government’s economic achievements betray an unmistakable nervousness.

The author is a Delhi-based commentator and analyst