The ongoing tussle between the Indian government and its central regulatory bank, Reserve Bank of India (RBI), is not as alarming as it is made out to be if viewed through a lens of debate being essential in a flourishing democracy.
The major points of difference between the government and the RBI revolve around loosening credit policies for medium and small enterprises and immediate exploitation of the bank’s reserves to address India’s growing fiscal deficit. While the former has been squeezed for a few banks under the ‘Prompt Corrective Action’ (PCA) framework that applies to state-owned banks, the latter is seen by the RBI as an easy way for the government to wiggle out of a corner instead of adopting tough ‘financial belt tightening’ mechanisms. The former Vice-Chairman of Niti Ayog, Arvind Panagriya, has urged the two to resolve differences keeping national interest in mind, and though the differences seem to have been partially resolved, we have not seen the last of such differences.
The Reserve Bank of India has a rich tradition of having independent-minded governors at the helm and three of them immediately come to mind – Bimal Jalan, Y.V.Reddy and Raghuram Rajan. The current governor, Urijit Patel and his team have been quietly assertive and determined to put forward their point, but have recognised the need to meet the government half-way.
Their appointment of RBI governors down the years reflects a bi-partisan acceptance of the need for an independent and autonomous institution to regulate and oversee India’s economy, which is the engine of India’s emergence as an influential power. There is also the reality of Indian politics that drives a wedge between institutions such as the RBI which look at long-term policies, and the executive, which succumbs to short term compulsions of populism and opportunism. This again, is an infirmity, which is not only typical of India, but is true for most democracies.
With elections around the corner and economic growth over the last fours years having been steady rather than spectacular, Finance Minister Jaitely will be under pressure to stimulate growth on the last lap, even if it means diluting the various safety nets that institutions like RBI lay out. Medium and Small Enterprises represent a sizeable segment of India’s emerging middle class and easing capital acquisition for them is important for the Modi government. One of the ways the Modi government is seeking to address the problem is asking the RBI to shed about 30 percent of its current holding of cash reserves of Rs 9.6 Lakh crores, which it feels are well above globally accepted norms.
When viewed with only modest employment generation efforts and rapid infrastructure growth, the need for additional capital cannot be overemphasized; the challenge for the Modi government will be how to stimulate growth and yet heed the cautionary interventions of the RBI. Holding the middle ground seems to be the best way forward for a reasonably stable Indian economy.