Bat­tle That Needs In­tro­spec­tion

FM-RBI spat rep­re­sents the need for an hon­est at­tempt to iden­tify lapses in fi­nan­cial gov­er­nance and reme­dies that do not en­croach on each other’s re­spon­si­bil­i­ties and rights

The Day After - - FOCUS - BY ASIT MANO­HAR

The on­go­ing dif­fer­ences be­tween the Re­serve Bank of In­dia (RBI) and the gov­ern­ment over the cen­tral bank’s au­ton­omy, specif­i­cally in terms of de­ci­sion-mak­ing, are a clas­sic ex­am­ple of how the weak­en­ing of the do­mes­tic in­sti­tu­tions can po­ten­tially desta­bi­lize the econ­omy.

As for the role of in­sti­tu­tions in an econ­omy, there is a wealth of lit­er­a­ture on the two schools of thought on in­sti­tu­tions and their role in an econ­omy. In terms of ‘old in­sti­tu­tional eco­nom­ics’ – sub­scribed to by econ­o­mists like Com­mons, Ve­blen, Hodge­son and Gal­braith among oth­ers – in­di­vid­u­als are con­sid­ered to be sus­cep­ti­ble to (or molded by) the in­flu­ence of the pre­vail­ing in­sti­tu­tions and cul­tural sit­u­a­tions. Thus in­sti­tu­tions are con­sid­ered to be im­por­tant agen­cies that in­flu­ence the be­hav­ior of in­di­vid­ual agents in mar­kets with their “in­for­ma­tional cog­ni­tive” func­tions.

As in­ter­preted above, busi­ness con­cerns and strate­gies are in­flu­enced by in­sti­tu­tions. They usu­ally in­flu­ence and ex­er­cise a ma­jor role on those de­ci­sions in mar­ket economies. Depend­ing on the busi­ness en­vi­ron­ment and the di­rec­tion of change in the pre­vail­ing in­sti­tu­tions, the im­pact can be fa­cil­i­tat­ing or desta­bi­liz­ing.

With mar­kets un­cer­tain, and un­cer­tainty as such sub­ject to grad­ing, in­sti­tu­tions may re­duce or en­hance un­cer­tainty and thereby change the level of con­fi­dence. Norms and pre­scrip­tions of­fered by in­sti­tu­tions can thus be re­spon­si­ble for the vary­ing re­sponses in the mar­ket.

The role of in­sti­tu­tions de­serves a men­tion in re­la­tion to the cur­rent state of the In­dian econ­omy and the rift as has come up be­tween the cen­tral bank and the of­fi­cial trea­sury, rep­re­sented by the Min­istry of Fi­nance. These are in the con­text of the cur­rent sit­u­a­tion where the fi­nan­cial sec­tor has been fac­ing mul­ti­ple prob­lems which in­clude the short­age of liq­uid­ity and the re­lated drop in credit flows.

The is­sue, how­ever, is just the tip of an ice­berg which has been build­ing up over some time, with the pil­ing up of non­per­form­ing as­sets (NPAs) in both state-run and pri­vate banks, the near-col­lapse of the non-bank fi­nan­cial cor­po­rate (NBFCs) in­clud­ing the bank­ruptcy of the IL&FS and the credit squeeze faced by the MSME con­cerns, to name a few.

The drop in credit avail­abil­ity is cur­rently viewed with con­cern by the fi­nance min­istry, which seeks a rem­edy with de­mands on the RBI to make avail­able ad­di­tional cash. De­mands as above have met with dis­plea­sure from the RBI which con­sid­ers such moves as an in­fringe­ment on its au­ton­omy.

LARGE NPA

Prob­lems in In­dia’s fi­nan­cial sec­tor can be

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