HEALTHY DIFFERENCES AND CONFLICT

It is normal for the RBI and the Government to disagree on a number of issues since the remit of both is vastly different. Therefore, there is no need to panic if news about these differences spills into the public space so long as these remain within the four corners of civility and a healthy discourse. Indeed, the only time the RBI did not have any differences with the government of the day was up until the late 80s when it was virtually an extension of the North Block housing the offices of the Finance Ministry. Particularly, following reforms and the opening of the economy, the sphere of independence and autonomy of the central bank has increased enormously. It is because not only has the economy grown manifold but the need for an independent watchdog for an ever burgeoning financial sector has become absolutely necessary. Yes, the tension between the Finance Ministry and the RBI is natural because the former very often is swayed by pure political-electoral interests, while the latter’s remit is to keep an eye on the general price-line and to defend the currency as far as possible. One fundamental area of disagreement is the prime lending rate. A succession of RBI Governors in recent times have had to resist intense pressures from the North Block to lower the PLR while the central bank found it hard to oblige in view of the overall economic conditions. Also, inevitably tension between Mint Street and North Block builds up on tight or easy liquidity. Politicians invariably want to liberalise credit disbursement while the RBI very often follows a tight money supply policy with an eye on the overall price-situation, especially, now, when the central bank is specifically tasked to keep inflation under check. Given the above background, the remarks of the Deputy Governor Viral Acharya, while delivering the annual A D Shroff Lecture in Mumbai last Friday, ought not to generate much heat. Indeed, it says a lot about the current government that the incumbent number two in the central bank could air these differences publicly since during P Chidambaram’s time in Finance so tension-filled was the atmosphere that the RBI bosses were supposed to bear it without uttering a word edgeways. Several RBI bosses of the time spoke of the confrontationist stance of the Finance Ministry only after their retirement, with some alluding to it in the books they wrote. Therefore, it is a plus that Acharya could publicly delineate the areas where the central bank differed with the government. The three areas he mentioned were the ever-present demand from the government to transfer more and more funds from its reserves, relaxing RBI restrictions on discretionary lending and limiting the central bank’s supervisory role. The fact that part-time directors on the RBI board have been pressing the central bank to allow greater and easier lending by cooperative banks -makes political sense in an election year -while the RBI is resisting the pressure is widely known.

RBI has to be ever mindful of the basic principles of sound lending, especially given the culture of irresponsibility prevalent under the previous regimes what with ever-greening of loans and outright write-offs. The consequences of the reckless lending are still with us, with the central bank and the government acting in tandem to clear the mess. Indeed, one of the reasons for a slower than expected growth is the on-going operation to recover money from the big defaulters in order to revive the health of the banking sector. Contrary to the scary view that Acharya’s remarks indicate a breakdown of communications between the central bank and the government, we believe that these are a reflection of the mutual respect they have for each other. Maturity on both sides is assured, though the government cannot be faulted for wanting to make the RBI come to its aid in an election year by relaxing the lending norms and to be more accommodative in respect of lending by cooperative banks. Neither side should question the other’s motives. RBI seeks to defend its turf only because it believes it can do a better job as an independent regulator of the economy. On its part, the government does not want to harm the economy knowing as it does that it would be electorally counterproductive, but nonetheless it seeks concessions for key constituencies of borrowers such as farmers, small and medium industries and other self-employed entrepreneurs with an eye on the coming elections. Surely, a middle ground can be found.