RBI Joins Hands with Ministry of Finance: Government For the Win

by November 21, 2018 0 comments

The ministry of Finance and Reserve Bank of India declared a truce, making the government a winner!

A century ago this month, an armistice was declared between the Allied Powers and the Central Powers, an armistice that ended the first ‘war to end all wars’. And a couple of days ago, an armistice was declared between the Union Finance Ministry and the technocrats at the helm of the Reserve Bank of India (RBI). The distrust between New Delhi and Mumbai has never been greater. The Government is desperate for funds after the crunch that recently hit the non-banking financial company (NBFC) sector. The RBI, on its part, made it harder and harder for small and medium companies to access funds from banks as it sought to repair the damage after years of ‘phone banking’ by previous regimes, wherein loans on favorable terms were doled out to industrialists close to the powers-that-be. The problem is that while the RBI is taking extreme measures to repair the damage to public sector banks, the fact is that many Indian firms are still scrambling to access working capital requirements.

The Government did have a point that the RBI was tightening the rules far too much. But its threats to go nuclear, as it were, and use a provision of the law that allowed the Government to effectively take over the RBI just because the Government needed more money, would have been the last nail in the coffin for the independence of India’s institutions. That would have been a complete over-reaction. The fact that the RBI stood up to the Government is a sign that it remains independent and the fact that it isn’t under the control of a pliant Governor, who does the Government’s bidding right, is evident. Opposition leaders, particularly Rahul Gandhi and P Chidambaram, were keen for the RBI to show some ‘spine’ since more liquidity in the economy ahead of elections can only be beneficial for the incumbent Government.

There is no doubt that this Government inherited an economy that had been laid waste by years of bad loans and crony capitalism. The public banking sector remains in a state of disrepair, some banks are just slightly better off than others. While the Narendra Modi Government has done some good things — it chose not to use all the political capital at its disposal to make fundamental changes to the Indian economy and instead chose to go down the curious path of demonetisation does raise eyebrows. And the move two years ago might have had a role to play in the current crisis, with the RBI unable to pay the Government the dividend it thought would be coming its way because of the costs imposed by demonetisation. However, this armistice is more in the nature of a temporary truce, with contentious issues put on the back-burner until the next Board meeting of the RBI in December. After all, the war to end all wars did not stop Europe from erupting again two decades later dragging the world down into a conflagration. What happens next remains to be seen. But ahead of the election in 2019, the outcome of the December meeting and the decisions of the committees that have been set up to look into the issues of contention may yet lead to a nuclear winter for the Indian economy.

Writer and Courtesy: The Pioneer

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