RBI deputy governor, Dr. Viral Acharya, while delivering a lecture, made a passionate pitch for central bank’s independence, and warned that any government that tries to undermine the independence of the central bank will end up triggering a financial crisis. This speech brought the bad blood between the central bank and the government to the fore. The question that is haunting the people is what made the RBI go public with its displeasure?
The main reason behind the tussle is the Modi dispensation’s muscular approach in promoting the interests of big business. They are well aware of the fact that in this neo-liberal era it is the big business tycoons who nominate the politicians to the top positions. Because the tycoons own the two most important and powerful instruments of control in the country – money and the media. And the people, through their vote, do the rest by electing one of the nominated politicians to power. In return for this favor, the tycoons want the laissez-faire aka trickle-down economics to be implemented so that they can have the ‘ease of doing business’. In other words, they want their glasses to be filled first.
And what are the nuts and bolts of implementing the trickle-down economics? Lower the interest rates to make capital cheaper, deregulate the banks especially the Public Sector Banks (PSBs) to facilitate the ‘ease of borrowing’ and subsequent defaulting, socialize the private losses as and when required in the garb of fancy sounding, schemy words such as ‘recapitalization’ and ‘liquidity infusion’.
And who is the biggest hurdle in their path? The Reserve Bank of India (RBI), without whose consent the government can’t push through its plan. That is exactly the reason behind the intense efforts that are being made by the union government to undermine the independence of the central bank.
When Dr. Raghuram Rajan was the Governor of the RBI, Jaitley wanted an interest rate cut. Now anyone who has a basic knowledge of economics knows whose interest an interest rate cut serves. It, without an iota of doubt, serves the interest of the tycoons and the government. Because a rate cut not only lowers the debt burden of the industrialists but also makes capital cheaper for them. And it also makes it easier for the government to repay its debt. A rate cut, however, results in an increase in money supply, which triggers an inflation in the country. Now, the inflation is a kind of hidden tax imposed on the poor as it makes their lives more laborious and burdensome since their incomes are not indexed to inflation. It also results in a lower savings rate because a deposit cut makes the middle class feel uninterested in saving and pushes them towards consumerism. Moreover, the Finance Minister asked for a rate cut when the inflation was not under control. Rajan, however, stood steadfast and resisted the government’s demands and thereby protected the interests of the poor and the middle class. For his principled stand he lost an opportunity to get an extension.
If the Modi dispensation wants to serve the interests of the industrialists effectively, it needs to speed up the process of deregulation in banking and financial systems. After the 2008 global financial crisis, which was a direct result of ‘deregulation’, the word acquired a lot of negative connotations and even attracted a backlash in the form of ‘Occupy Wall Street’ movement. Keeping this in mind the politicians and the tycoons, who constitute the pro-deregulation camp, started employing the euphemistic terms such as ‘regulatory forbearance’ to confuse the people. In fact, deregulation is one of the major achievements of this government and it got rewarded with a sudden and extraordinary spurt in World Bank’s ease of doing business ranking during the last two years.
The government, however, is facing a major hurdle even with its deregulation mission. The RBI, in addition to administering the monetary policy, also carries out its regulatory responsibilities. Our laissez-faire capitalists, who resent and abhor anything government, borrowed trillions of rupees from the government-owned Banks and defaulted. Now the RBI, through its Prompt Corrective Action (PCA) framework, started tightening things and not allowing any ‘regulatory forbearance’. This is exactly where the crony capitalism infested Modi dispensation started feeling the ‘unease’. In the name of free enterprise and promotion of growth, they want rampant deregulation, as if their tycoon cronies are honest enough to self-regulate themselves. The gargantuan accumulation of the NPAs stand as a testimony to the crookedness of the tycoons and how they looted the nation with ‘ease’. Now, the government, instead of being strict with the defaulters, is recapitalizing the banks with public money and coercing the RBI to deregulate further.
It appears that the government, in its alacrity to enter the good books of Moody’s and get yet another sovereign rating upgrade, started eyeing the reserves in the possession of the RBI to narrow down the fiscal deficit. It also plans to use the reserves to recapitalize the banks with an aim to write off more corporate debt to keep the rent-seeking corporates happy particularly when the elections are around the corner. The reserve bank, however, feels that it needs those reserves to maintain monetary and financial stability. The global economy, owing to its heavily debt-laden nature, is precariously balanced and financial turmoils and contagions are increasingly becoming frequent. And the distressingly week banking system also requires the central bank to possess enough reserves to be able to carry out its responsibilities as the lender of last resort.
The government, to undermine the independence of the central bank, appointed people such as S. Gurumurthy and Satish Marathe on the RBI board, who are well-known members of the Sangh Parivar. It is very surprising that Mr. Gurumurthy, who founded the Swadeshi Jagran Manch (SJM) and canvassed for India’s economic self-reliance through savings and small enterprises, is promoting the consumerist, neo-liberal agenda by pushing the big business interests.
The RBI, even in the face of a threat to invoke Sec 7 of the RBI act, which facilitates giving directions to the central bank by the union government, stood steadfast and refused to give any leeway. At one stage there were even reports suggesting that the RBI governor Urjit Patel may even step down from his post. Though the big businesses want the independence of the RBI to be curbed to facilitate ‘regulatory forbearance’, any dilution of the central bank’s independence will invariably lead to corrosion in investor confidence and may lead to a capital flight. Therefore, sensing the danger of an escalation the central government appears to have backed off on the issue temporarily.
It appears that this government, in its over-enthusiasm to favor the big businesses and to get rating upgrades, is ignoring the long-term consequences of its actions. Blindly following the tycoon-centric trickle-down economics and getting obsessed with rating upgrades will only result in undermining the central bank and will ultimately lead to the weakening of the economy. Therefore, the current political dispensation, which loses no time in glorifying the nation and making claims to strengthen it, should understand the fact that a nation’s prestige could be augmented not by undermining its democratic institutions but by further strengthening them, and not by promoting big business interests but by investing in social infrastructure to enrich human capital.