High time FM, RBI found a middle turf

When one heard finance minister Arun Jaitley defending demonetisation, which even its originator has since disowned, one feels pity for him because he was merely doing a mercenary job as he had very little to do with the ill-fated decision. But when one finds S Gurumurthy, the newly-inducted independent member of the RBI board of directors, claiming that the Indian economy would have collapsed but for demonetisation, one feels pity for every Indian.

Ploughing a rather lonely furrow on the second anniversary of Modi’s ‘monumental blunder’, Jaitley said demonetisation of Rs 500 and Rs 1,000 notes led to formalisation of the economy, more tax collection and higher growth. Modi had led the nation to believe that demonetisation and the huge sacrifices that the people were called upon to make for the sake of such a worthy cause were meant to flush black money. When everyone was complaining that nearly all the notes in the demonetised denominations came back to the banking system, indicating that all those who had hoarded black money actually made their ill-gotten money white, Jaitley considers it as a virtue.

“A widely stated comment has been that just because most of the currency came back into the banks, the object of demonetisation has not succeeded. Was the invalidation of the non-deposited currency the only object of demonetisation? Certainly not,” Jaitley wrote in his blog, which seems to have become worthy of being added as a new portfolio in his responsibilities as finance minister for want of anything better.

But with all his failings, and enthusiasm for Modi’s misadventure, he did not go to the extent that Gurumurthy did, claiming that the Indian economy would have collapsed but for demonetisation because high denomination notes of Rs 500 and Rs 1,000 were being used to purchase real estate and gold. His logic is indeed strange, as if there is a ban on the use of the Rs 2,000 notes for transacting real estate deals and gold purchases. He is disappointed that the economists and intellectuals don’t understand this. “It is unfortunate that economists and intellectuals have not taken the right position on demonetisation and GST,” he said during a lecture at the Vivekananda International Foundation.

Accountants are strange people. They see every problem in the world as an accounting issue and how one shows it in the books. It is the heading under which an item is entered that creates the problem. If some problem can be shown under a category that is meant for something else, the problem itself ceases to exist. This is no mundane accounting, but an accounting philosophy, maybe comparable to the value of zero in Indian philosophies, particularly the Hindu way of looking at things, in which he is no less a guru than anyone else. It is similar to the famous Benjamin Franklin truism a ‘penny saved is a penny earned’.

Then he makes a great discovery about the toxic assets of public sector banks, which has been a point of confrontation between the RBI, on the board of which he won a directorship by gratis on account of the colour of his thoughts. He says the banks ran up the problem because they indulged in excessive lending: the next best discovery after the one by Archimedes. And he cites former governor Raghuram Rajan as endorsement. “Even Raghuram Rajan admitted that excessive lending which took place during 2006-2019 resulted in bad loans,” he has been reported as saying.

It is clear that the government had nominated Gurumurthy on the RBI board so that the apex bank could benefit from such wisdom. And it came very handy for the Modi government in its stormy relations with the central bank, which had reached a flashpoint before the respective positions eased a bit between governor Urjit Patel and Jaitley’s finance ministry.

Gurumurthy has a magic wand by which a crisis can be created out of nothing and once created, it can be made to disappear into thin air in the next moment.

He blamed the Reserve Bank for mandating one-shot provisioning for bad loans instead of following an approach of gradualism, which he claims dissipates any problem. “NPA has been developing since 2009 and it peaked in 2014. At that time, RBI did not say ‘you provide’ but in 2015 it uttered ‘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 ahead of a crucial meeting of the board, which is expected to see fireworks, although some kind of a truce has been established between the banking supervisor and the government.

The two sides are looking for a middle ground on the issue of liquidity and lending operations by banks, which have been severely curtailed by the Reserve Bank clamping down on the erring banks. The government’s worry is understandable as it is facing a tough election year to be followed by the allimportant 2019 do-or-die battle, in which poor show on the economic front is a liability that the Modi government is desperately in need of unloading.