The American businessman and humorist Arnold Henry Glasow once said, “A good leader takes a little more than his share of the blame, a little less than his share of the credit.” But in India it’s the other way around, with politicians never failing to seize an opportunity to take credit more than they deserve and blame others for their own failure. This is precisely what is happening these days between government and Reserve Bank of India.
It is the worst of times for the economy: the largest employment providing sector, agriculture, is in deep distress; rupee has tanked to its historical low ($1 = Rs 74.38); gross non-performing assets of banks are hovering at an alarmingly high level (12 per cent); the government, which earlier enjoyed fiscal comfort by hiking duties on fossil fuel amid falling crude oil prices, is now struggling to fill its coffers, especially in the midst of faulty implementation of GST; institutions are resorting to incriminate each other. The recent spat between the Center and the central bank is an example of the ongoing blame games in contemporary India.
Although the tussle between North block (Ministry of Finance) and Mint Road (the RBI headquarters) is not unprecedented, its intensity is. It was perceptible in the letters and meetings between the two. On the humid afternoon of August 2, however, it reached the boiling point when a government official at Raisina Hills in New Delhi gave a catchy headline to Cogencis, a financial news wire: “Govt pegs RBI excess capital at 3.6 trillion rupees [Rs 3.6 lakh crore], seeks it as surplus.”
According to Section 47 of The Reserve Bank of India Act, 1934, the central bank transfers surplus profit to the government. In 2017-18, it transferred Rs 50,000 crore to the public exchequer, though the Finance Ministry expected more. In fact, in the last five years, the RBI has transferred more than 70 per cent of its profit as surplus to the government. Despite this, the government wants more.
According to the RBI’s Annual Report, as on June 30, 2018, the bank had a total of Rs 8.59 lakh crore in its Contingency Fund, the Asset Development Fund, the Currency & Gold Revaluation Account, and its investment revaluation account for rupee securities. Central banks are not regular banks. They are unique both in their functions and their objectives. That’s why they were founded as “special” commercial banks. They are the “lender of last resort.” So, they need to maintain a contingency fund to meet unexpected and unforeseen contingencies including depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks, and any risk arising on account of the special responsibilities enjoined upon the central bank.
A few days later, another bombshell came in 52 words on the micro-blogging site Twitter. It was the confirmation of acceptance of the RBI board directorship by S. Gurumurthy, a charted accountant who is associated with the RSS affiliate Swadeshi Jagran Manch. On August 8, he tweeted early in the morning, “Story of my appointment as director RBI. This is the first directorship ever. Never accepted any private or PSU directorship. Not even audit of PSUs or Pvt cos. Wanted to be free to speak. But when pressure built up I am needed to do something in public interest I had to accept.”
On August 28, in another development, the Allahabad High Court denied relief to power firms from the RBI’s NPA deadline. The companies had challenged the RBI’s February 12 circular on bad loans. The RBI, in its circular, had tightened the norms for settling such loans by allowing lenders to initiate insolvency proceedings against defaulters, besides setting timelines for resolving bad loans. Although banks were given several options to arrive at a resolution plan, they had 180 days to do so. The central bank also introduced the concept of a one-day default, under which banks have to identify incipient stress even when repayments are overdue by a day. This development fueled speculation that government may use powers given under Section 7 of the RBI Act to advise the central bank. Although government is entitled to use this provision, it has not done it yet.
These developments triggered the fear of the government stepping on the RBI turf. The result? Unheard of measures by the central bank and an unexpected speech from its Deputy Governor Viral V. Acharya who openly voiced his differences with the government.
On October 19, the RBI released its dissent note on Inter-Ministerial Committee for finalization of Amendments to Payment & Settlement Systems Act, 2007. Although the report of the Inter-Ministerial Committee was made available on the website of the Department of Economic Affairs on September 19tand included divergent views of the RBI in a separate section, the central bank choose to issue a press release on the issue so that it could officially make public its dissent. Observers found it unusual as the central bank hardly ever made dissent in such a manner.
Meanwhile on October 4, petrol and diesel prices reached at the all-time high level—and that too in the run-up to the five crucial Assembly elections. The government felt the heat of the growing public anger over high fuel prices. Despite the glaring shortfall in GST collection in comparison to the budgeted figure for this year, the government buckled under public pressure and announced an excise duty cut on petrol and diesel.
The consequence was a higher shortfall in revenue mobilization. This led to the government asking the RBI for more surpluses though it did not do so openly. It also wanted some relief for the micro, small, and medium enterprises or MSMEs which had borne the brunt of demonetization and haphazard GST implementation. The RBI did not yield on government feelers.
Finally, the central bank broke the silence and Acharya delivered a speech, asserting the independence of regulatory institutions. In his lecture, ‘On the Importance of Independent Regulatory Institutions: The Case of the Central Bank,’ he gave an account of events that led to the dramatic exit of Martin Redrado, Argentina’s central bank chief, in 2010.
Acharya quoted Redrado as saying , “Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability.” Acharya said, “The roots of this dramatic exit lay in an emergency decree passed by the Argentine government led by Cristina Fernandéz on December 14, 2009, that would set up a Bicentennial Stability and Reduced Indebtedness Fund to finance public debt maturing that year. This involved the transfer of $6.6 billion of the central bank reserves to the national treasury. The claim was that the central bank had $18 billion in ‘excess reserves.’ In fact, Mr. Redrado had refused to transfer the funds; so the government attempted to fire him, by another emergency decree on January 7, 2010 for misconduct and dereliction of duty; this attempt, however, failed, as it was unconstitutional.”
Acharya said that it was RBI Governor Urjit R. Patel who suggested him to explore this theme for a speech. Acharya also warned about the “wrath of the markets.” His speech went viral in the social media and critiques of the government did not lose the chance to target the Finance Ministry. The government went on the back foot. In a desperate attempt, DEA Secretary Subhash Chandra Garg tweeted, “Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?”
Many found this tweet in very bad taste; none from the government supported Garg’s views. It appeared as if Garg had forgotten that he also shared some responsibility of managing the economy. On November 8, anniversary of the demonetization, Garg tried to clarify, saying, “A lot of misinformed speculation is going around in media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated.”
While the government’s management of the economy leaves a lot to be desired, the central bank’s actions too don’t seem to be without blemish. For instance, it allowed the LIC to take over the sick IDBI Bank by buying 51 per cent equity—a violation of the norms which stipulate that LIC cannot acquire more than 15 per cent in a company.
It was against this backdrop that the much-hyped meeting of the central board of the RBI was held on November 19 in Mumbai. The Opposition seized the opportunity to criticize the government. Just two days before the meeting, former finance minister P. Chidambaram tweeted, “Government is determined to ‘capture’ RBI in order to gain control over the reserves. The other so-called disagreements are only a smokescreen.”
On November 19, after the nine-hour meeting, the RBI’s central board issued a statement announcing the decision to constitute an expert committee to examine the Economic Capital Framework (ECF). The membership and terms of reference of this committee will be jointly determined by the government and the RBI. The board also recommended that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore. With regard to banks under the prompt corrective action or PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of the RBI. Thus, to solve the tussle between the government and the RBI, the board chose a middle path.
It takes years to build the credibility of an institutions but it can be shattered by a bad decisions. That’s why it would be imperative for our leaders to learn from this episode the blame game hurts all and benefits none. As Glasow put it nicely, “One of the tests of leadership is the ability to recognize a problem before it becomes an emergency.”