India’s worst kept secret is that the Reserve Bank of India (RBI) and the finance ministry do not get along. Indeed it stems from the nature of the two institutions—one headed by a technocrat and the other by a politician—pursuing contrasting objectives. Yet, amazingly every time there is a confrontation it triggers a news cycle of intense outrage.
True to form, last week, we were witness to another round of recriminations—undoubtedly more intense than what one has witnessed previously, but really a case of old wine in a new bottle. Those with a keen memory will recall the then finance minister P. Chidambaram saying after a severe tiff with RBI in 2013, “Growth is as much a concern as inflation. If the government has to walk alone to face the challenge of growth, we will walk alone."
Part of the reason for the excessive blood letting this time was the strategic leaks of hostile communications between the finance ministry and RBI, days after its deputy governor Viral Acharya went public articulating the differences and warning that any attempt by the union government to cross the red lines would come at a cost. The veiled reference was against the use of Section 7 of the Reserve Bank of Act, 1934, which allows the union government to override the central bank. Significantly, this is not the first time a political regime has threatened RBI with what we know in strategic parlance to be the nuclear option.
The trigger this time was seemingly due to the intransigent position adopted by the two institutions over three issues: exempting severely indebted power companies from the 12 February circular which identified them as bankrupt; dilution of lending norms for a bunch of fiscally vulnerable public sector banks to extend credit to the cash strapped small scale sector; and, transfer of accumulated RBI reserves to the Union government to bridge its fiscal deficit gap.
The first two issues, it can be argued, could potentially serve the electoral interests of a poll-bound government—while the SME (small and medium enterprise) sector is the catchment area for jobs, reviving power units will generate economic activity besides helping meet the promise of electricity for all.
We have spent the better part of last week figuring who is in the right. True to our penchant for a binary discourse on all contentious issues the conclusion depends on who you speak to. For instance, within the media, there is a Mumbai view (echoing RBI) and a Delhi view (influenced by the Union government). This time bulk of the initial leaks came from Mumbai—and since they were published with a Mumbai dateline it is safe to presume that mandarins of Mint Street were dishing out information—shaping the narrative that an aggressive Union government giving short shrift to economic logic in pursuit of short-term electoral gains.
In short, RBI for its part is right in insisting that the rule book needs to be adhered to. But the government, on the other hand, is equally right in arguing that institutional freedom of RBI is not absolute—especially if it believes that the decision could hurt an economy which is at a point of inflexion.
Regardless, there is a solution that can preclude verbal joisting: transparency. For too long RBI, on the pretext of being the guardian of confidential economic information, has concealed its actions and thinking behind a veil. The present RBI governor Urjit Patel has taken this to another level—he has virtually shut out the media, except while making the credit policy statements.
Similarly, a big failing of the present Union government has been its inability to articulate the logic of its economic actions. Even routine press releases have ended up being corrected—in one instance more than once. It too has preferred to keep the media at arms length or speak selectively.
Assuming both sides are shy of speaking to the media for justified reasons, nothing prevents them from sharing the scope of mutual dialogue in some form of minutes from the meeting. If nothing, it will help keep experts outside the official system who can be tapped for consultation stay appraised.
But the question is whether either side wants to end this cloak and dagger game.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics. His Twitter handle is @capitalcalculus