Current cash crunch underlines the need for a deeper look at the adequacy of India's monetary and financial regulatory institutions
In Oscar Wilde’s The Importance of Being Earnest, the formidable Lady Bracknell has these unforgettable lines—“Losing one parent is a tragedy. Losing both looks like carelessness.” This is the appropriate response to the cash famine caused by the inefficiency of RBI.
RBI is a venerable institution, one of the older central banks in the world. Lately, it has been winning autonomy, and has fashioned a creditable monetary policy framework. This is, of course, the proper job of any central bank. But, it has now failed twice within 15 months to provide necessary amounts of currency for public use. It caused serious damage to prime minister Narendra Modi’s bold plan for demonetisation by failing to provide adequate amount of new currency on time.
A serious hardship was caused to countless people’s fragile daily lives due to the inability of RBI to see to it that new currency was printed on time and delivered to outlets across the country. It was said in its defence then that the printing presses had been working three shifts full-time. That, however, is no excuse. If the Bank had not calculated that, even at full capacity, the printing presses would be inadequate, it was obviously inefficient. If it had, but failed to bring in supplementary help from India or abroad, it showed a lack of managerial competence. It is no excuse to say that it could not trust foreign suppliers. If India is to act like a modern economy, it needs to get its fear of the foreign out of its system.
But to repeat the failure within 15 months is unpardonable. Once again, the excuses are familiar. Shortage of ink which comes from abroad. Yet again, maximum effort but not enough. To say that 60% of the ATMs are working, is pathetic. The latest claim, that it is 80%, is derisory. It has to be 100% all the time. After the last fiasco, new capacity should have been added on the printing side. If the problem is a logistical one, of delivery to distant parts of the country, it should have been addressed. The reason given for the breakdown is that there was unexpected cash withdrawal. Unexpected by whom? Obviously, RBI. If so, what was the reason?
Inadequate or out of date forecasting methods for currency demand? Failure to see that given the precarious state of PSU banks and people’s fears that FRDI Bill may compel depositors to provide support for the failing banks? As it is, the lapses at PNB and other PSU banks indicate a failure to monitor bank behaviour on part of RBI as the regulator. The least it could have done is to anticipate the reaction to the fears of depositors.
There is now clearly an urgent need for a reform of our monetary machinery. RBI does a fine job in monetary policy and fighting inflation. But it is not good as a provider of currency. This task should be given to an independent public body under a Comptroller of Currency. Printing and providing adequate amounts of currency on time is a vital task but this is a logistical and management task, not an economic one. It is obviously too difficult for RBI which has more important things on its mind.
But along with that, it may be time for the finance ministry to think about a new structure for financial regulation—one that is separate from, but well coordinated with, RBI—as the UK has done. India is becoming a sophisticated modern economy, and the finance ministry needs to prepare for these new needs. It will require complex legislation and Parliamentarians have been unable to do any business beyond rushing to the well in response to the latest breaking news day after day.
Even so, it may be time for a deeper look at the adequacy of the monetary and financial regulatory institutions. If necessary, the government should appoint a high-powered commission to take a serious look at the issue. If politically possible, it should invite foreign central bank governors to join such a commission.