There are doubts that are being raised by the government-RBI spat. Doubts lead to uncertainty, which is bad both for the economy and the markets
Differences of opinion between the government and the Reserve Bank of India are nothing new. Tensions have always existed between them. This time though, the pressures on the central bank are very likely much more, to cause such an outburst from deputy governor Viral Acharya.
There are several questions that are raised by this quarrel. There is the question of the independence of the central bank, about which a voluminous literature exists and there are strong opinions on both sides. There’s the question of the long-term effect on institutions if the government keeps chipping away at them. There’s the question of whether democracy is strengthened if power is distributed across institutions.
These are all important issues and deserve to be debated at length. But this column will limit itself to discussing whether the government-RBI spat is reason for worry in the immediate future.
Why, for instance, does the government want the restrictions for banks under the Prompt Corrective Action (PCA) mechanism to be relaxed? Is it to allow them to lend more? That could be so if the government is worried about growth. But GDP growth was an impressive 8.2% in the June 2018 quarter and it’s likely to be around 7.4% or so this fiscal year. We are the world’s fastest-growing large economy, as we have been told many times. Why then the concern about growth? Or is it that the government feels growth may not be all that rosy after all?
As of 12th October, the rise in non-food credit by scheduled commercial banks was a good 14.5% year-on-year. With consumer price inflation below 4%, that’s a real rate of growth of over 10% in bank credit. Why then does the government want even more lending? Perhaps it feels that most of the growth is on account of personal loans and it wants more credit to go to industry. Perhaps, despite its bravado on the jobs front, it knows that not enough jobs are being created. It could also be that small industries are struggling due to the twin blows of demonetization and the Goods & Services Tax (GST) and it wants the state-run banks to help. The government pressure seems to suggest that all is not well on the economic front and it is concerned that this may have an impact on the elections.
The other issue is reportedly the dividend to the government from the RBI. But the government has repeatedly said that it will be able to meet the fiscal deficit target. If so, where is the problem? Or could it be that, despite keeping up appearances, it is concerned that the deficit may be overshot, as many economists are predicting?
Then there is the matter of the non-banking finance companies and the liquidity crunch emanating from the IL&FS debacle. Why is the government’s assessment of the situation different from that of the RBI? That raises the unsettling question: is the matter far more serious and does the government know something the market doesn’t?
These are some of the doubts that are being raised by the government-RBI spat. Doubts lead to uncertainty, which is bad both for the economy and the markets. It is possible that these doubts are uncalled for and the government merely wants to ensure we have a booming economy during the general elections.
But the sooner the government comes clean on the matter, the better for all concerned.