BackWho tried to clip the RBI governor’s wings?
The finance ministry is trying hard to distance itself from the draft India Financial Code that reflects its own views
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New Delhi: The three top men in the finance ministry, senior minister Arun Jaitley, his junior Jayant Sinha and chief economic adviser Arvind Subramanian, have been at pains to clarify that a controversial provision of the draft Indian Financial Code (IFC) that seeks to limit the powers of the central bank governor is not the government’s view and is merely a suggestion made by a panel of experts drafting the code.
Only, it seems that the government had made changes in the original draft code to introduce the provision, not the Financial Sector Legislative Reforms Commission (FSLRC).
The controversial change in the code, released for public discussion on 23 July, vests with the Union government the right to appoint four members to the seven-member monetary policy committee of the Reserve Bank of India (RBI) and removes the central bank governor’s veto power over the advisory committee on monetary policy changes. This simply means that the governor will have to go with the majority view.
Some experts see it as a direct attack on the RBI governor, a move that they say will erode the autonomy of the central bank. Others see it as a move away from the current system, which vests the RBI governor with too much power, to a more institutional and transparent system. The debate continues, but the immediate reaction of the government has been to distance itself from the controversy.
The FSLRC, headed by retired Supreme Court judge B.N. Srikrishna, was constituted in March 2011 to study possible reforms in the financial sector. The commission, in its report submitted in March 2013, suggested a seven-member monetary policy committee with a majority from RBI and retained the current veto power of the governor in deciding interest rates.
An official letter from the finance ministry reviewed by Mint shows that on 22 December, the finance ministry constituted a three-member expert group involving justice Srikrishna; M.S. Sahoo, a former member of Securities and Exchange Board of India and now a member of the Competition Commission of India (CCI), and Somasekhar Sundaresan, a partner with law firm J Sagar Associates, “for the purpose of guiding the process of review of the proposed draft Indian Financial Code based on the comments received from the public and stakeholders, on draft proposal". The expert group was assisted by C.K.G. Nair, an adviser in the finance ministry and the National Institute of Public Finance and Policy-department of economic affairs (NIPFP-DEA) research team headed by Ajay Shah, a professor at NIPFP.
The tenure for the engagement was initially fixed up to 28 February, which was later extended till June end, when justice Srikrishna submitted the revised IFC to the finance ministry.
Responding to Mint’s queries, justice Srikrishna confirmed his engagement in the review process, but maintained that the revised IFC reflects the finance ministry’s views. “The revised draft of the IFC is FSLRC’s recommendations as modified by the government of India. It is neither my view nor is it FSLRC’s view. It reflects the government’s view," he said.
“The FSLRC submitted its report to the government in 2013 and it was up to it to accept the report fully or partially or reject it. The government wanted some changes to the report. There was also feedback from various regulators. The government wanted me to make the changes in the code, but this time my role was only to ensure that the legal language is correct," he added.
According to Srikrishna, the FSLRC’s recommendations gave a more balanced representation to both the government and RBI. “The government did not want that. The new draft proposes that the government can appoint more members," he added.
A government official familiar with the functioning of the three-member review committee said it was mandated to only review the draft prepared by the government. “The original drafting was done by NIPFP based on the finance ministry’s views. Then both the ministry and NIPFP officials sat with the committee to fix the legal language. It is only incidental that the government asked the former chairman of FSLRC to review the draft in his individual capacity and not under his capacity as the chairman of FSLRC which was disbanded the day the commission submitted the report. The committee only reviewed some processes and not the content of the report," added this person, who asked not to be identified.
Sahoo confirmed that he was one of the three experts asked to review the draft IFC. However, he said that after joining CCI as a full-time member, he recused himself from the job on 31 March.
M. Govinda Rao, a former director at NIPFP and a member of the FSLRC, said the revised code is not a FSLRC report. “I don’t know why everybody is calling it an FSLRC report. We submitted our report in 2013 and then the committee vanished. FSLRC has nothing to do with this."
Rao said the idea behind the original FSLRC report was to have a wider consultation on monetary policy and then leave the RBI governor to take a final call. “You cannot assign the job of price stability to the governor and not allow him to calibrate monetary policy. It is like tying somebody’s hands and legs and asking him to run," he added.
Another member of the commission also confirmed that the FSLRC was not involved in the drafting the revised version of the IFC. “I hope the statements coming from the government about FSLRC drafting the revised version stem from ignorance," the member said, speaking on condition of anonymity.
On 24 July, a day after the revised IFC was released and faced widespread backlash, the government came into damage-control mode. Subramanian said: “FSLRC report is a report of FSLRC. It is not the report of the government or the finance ministry. The report is not the view of the government."
On 25 July, minister of state in the finance ministry Sinha told The Economic Times: “The draft IFC is a proposal put forth by FSLRC that has been submitted to the government. We are considering it. It is only an input into the government’s deliberations."
On 27 July, finance minister Jaitley, speaking to reporters inside the Parliament campus, said: “FSLRC has made its recommendations, which have been made public for comments. After the comments are received, it is only then that the government will take a view."
Commenting on the proposed changes in monetary policymaking, Moody’s Analytics, the research arm of Moody’s Corp., in its India Outlook released on Thursday, said a government-elected panel in the monetary policy committee will undermine RBI’s independence. “Moving to the new model would severely dent RBI’s competency. Credibility would be lower, politics would drive decisions, and transparency would be reduced. Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability. But given the criticism of the draft bill, it is unlikely to pass Parliament," it added.
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