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THE GIST of Editorial for UPSC Exams : 12 December 2018 (Never waste a good crisis)
Never waste a good crisis
Mains Paper 3: Economy
Prelims level: RBI
Mains level: Economic growth, development and related issues
Context
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The quintessential traits of a central banker is to be unpredictable in action so that the markets can be kept guessing.
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Urjit Patel exhibited this quality in ample measure when he announced his decision to walk out of his job as Governor of the Reserve Bank of India (RBI) on Monday.
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His resignation caught everyone by surprise, including the markets which had been lulled into believing that the spat between the central bank and the Centre had been amicably resolved.
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The rumours of him resigning, which were doing the rounds before the last meeting of the RBI central board three weeks ago, had died down.
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He had chaired the Monetary Policy Committee meeting just last week and also a meeting of the Board for Financial Supervision that discussed the issue of Prompt and Corrective Action on some banks.
Governance issue
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The one important issue that remained on the table after the November board meeting was of the central bank’s governance and autonomy.
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Interestingly, in the days following the meeting, there were reports of how the Centre was planning to push for board committees that would supervise specific areas of the central bank’s operations.
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Such a move would have compromised the Governor’s position and curtailed his operational freedom. Was this the proverbial last straw for Dr. Patel?
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It is not as if RBI Governors have never had serious run-ins with the government before.
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They were always handled quietly behind the scenes and the only way that the public ever got to know of these episodes was when RBI Governors wrote memoirs.
Ill-advised escalation
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There are those who believe that the RBI had no option left after the Centre began consultations under Section 7 of the RBI Act, which empowers the Centre to direct the RBI to act as per its instructions.
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Yet, all that the speech achieved was to harden the Centre’s stance.
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It upset the delicate balance between the RBI and the Centre.
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Though, as the sovereign, it holds the ultimate authority, by convention the Centre has granted a certain autonomy to the RBI in its functioning.
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The main point of friction between the two on monetary policy was also addressed through the introduction of the Monetary Policy Committee two years ago by amending the RBI Act.
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In effect, an important thread in the relationship was institutionalised and the personal element was taken out, precisely to avoid situations such as the current one.
Tussle between Government and RBI -
It is true that the Centre has been more assertive in its relationship with the RBI in recent times, but it has some genuine grievances such as on the issue of providing liquidity for non-banking finance companies and a less stringent capital norms regime for banks.
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As the political executive, the Centre obviously feels that it is responsible for ensuring that there is no freeze in the credit markets.
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There is nothing wrong with that.
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The central bank, however, is more conservative.
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The last thing that it wants is to create another bad loans environment just as it is beginning to get out of an earlier mess.
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The fact is that both sides were working with the right intentions and reasons, and given this, it should not have been impossible to find a middle road behind closed doors.
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The Centre’s grouse that the RBI was found wanting in its supervision role.
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The Punjab National Bank fiasco and the IL&FS collapse both happened right under the nose of the RBI, which is supposed to have conducted regular inspections of both entities.
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Neutral observers have also pointed to these lapses.
The road ahead
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The damage is now done, but what’s the road ahead?
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The crisis points to several reforms that are needed in the RBI and changes in its equation with the Centre.
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As former RBI Governor Raghuram Rajan points out in his book, we need a clearer enunciation of the central bank’s responsibilities.
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The position of the RBI Governor in the government hierarchy is not defined clearly.
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“There is a danger in keeping the position ill-defined because the constant effort of the bureaucracy is to whittle down its power,” argues Dr. Rajan.
Way forward
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The personal element in decision-making in the RBI has to be taken out and replaced by an institutional mechanism.
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It much like the MPC did in the case of monetary policy.
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The reference of the reserves sharing issue to a committee is one such idea where there will be little scope for the Governor to act on his own just as the government too cannot exert pressure on him.
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Prelims Questions:
Q1. In the aftermath of Demonetisation, which among the following actions can facilitate return of growth in the economy?
1. Fast, demand-driven remonetization
2. Reducing tax rates and stamp duties
3. Bringing real estate into the GST
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 1 and 3 only
(c) 3 only
(d) 1, 2 and 3
Answer: D
