Make RBI more consultative, don’t kill its independence

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New Delhi | Published: November 27, 2018 4:02:22 AM

Also, many sectors like power/telecom hit by bad govt policy, real estate by DeMo and RERA; unfair to blame RBI for this

Fixing RBI’s governance can’t be divorced from doing the same for the country’s economic governance.

Economic Affairs secretary Subhash Garg makes a valid point when, while elaborating on finance minister Arun Jaitley’s statement on how the government was merely attempting to make RBI more consultative, he gives the example of the Monetary Policy Committee (MPC) set up to decide on interest-rate policy. The earlier system, he says, vested all decision-making authority with the RBI Governor but, while giving this power to the MPC didn’t reduce the central bank’s independence, it made it a lot more participative; indeed, this is in line with the practice in other central banks like the US Federal Reserve. The US Fed, Garg said to FE by way of example, conducts public meetings and also has several committees that give inputs that go into its decision-making. So, if the discussion on RBI’s governance systems—in the December 14 board meeting—results in RBI becoming more consultative in its decision-making that can only be a good thing. Especially since, despite most market participants routinely complaining about the lack of liquidity in the market—estimates are there is a shortage of Rs 1 lakh crore right now—the central bank has not done enough. While this may be related to its fear of inflation rising, as so many economists have pointed out, the danger of this is quite low right now.

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But, while working on making RBI more responsive and consultative, care has to be taken to ensure the central bank doesn’t lose its independence in the process. After all, while getting as many inputs as possible is desirable, policy-making can’t be an exercise in democracy. And, if various committees are stuffed with government nominees that do its bidding, and their recommendations are binding, surely that crimps RBI’s independence? And while Jaitley is right in saying elected representatives are held accountable by the electorate, it can be no one’s case that independent regulators are not essential. Indeed, the government dealt a big blow to the independence of regulators when, within days of coming to power, it appointed a former Trai chief as the principal secretary to the PM and, more recently, when it reappointed the Trai chief. One of cardinal principles to ensure regulators don’t ingratiate themselves to the government is to ensure that the government cannot reappoint them for any job; this principle was violated, not once but twice, at Trai.

Also read: After Moody’s, this rating agency says that Modi govt could miss fiscal deficit target; here’s why

It is also important to keep in mind that many of the issues the government is battling RBI over—increased credit for MSMEs, forbearance for the power sector—have been aggravated by government policy, so expecting RBI alone to fix them is unfair, and it isn’t going to work either. MSMEs were delivered a big blow by demonetisation and later GST—even though, the latter was a good policy—so it is disingenuous to blame the MSME problem on banks/NBFCs lending less to them due to RBI policy. Demonetisation, and the subsequent difficulty in carrying out cash transactions, along with the RERA legislation—once again, RERA was desirable—dealt a big blow to the real estate sector, so it is unfair to hold RBI as primarily responsible for the travails of the sector. And given the problem of power sector NPAs was caused due to bad government policy (goo.gl/eL96Fg), surely the RBI’s February 12 circular isn’t the problem; as a corollary, keeping this in abeyance isn’t going to help either. While the next set of big NPAs will come from the telecom sector, where all debt is held by companies that have an interest cover of less than one—bank loans are over Rs 2.5 lakh crore—as this newspaper has extensively chronicled, this is almost entirely due to rapacious government policy over the years. In the case of issues like relaxing norms for PCA banks, the government should keep in mind that, since these banks have such poor governance, anything that allows them to lend more will only add to the size of the eventual tax-funded bailout. Fixing RBI’s governance can’t be divorced from doing the same for the country’s economic governance.

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