Chidambaram: Modi government thinks it owns RBI, wants bank’s ‘hoard of cash’

Former Union finance minister P Chidambaram alleged the BJP-led Centre thinks that it "owns" the Reserve Bank of India and does not understand the independence of the central bank, while asserting that the Union government is only after "hoard of cash" and "pot of gold".

Addressing the Lokmat National Conclave, he hit out at the Union government over the appointment of Shaktikanta Das as the RBI governor, saying it "worries" him that an official who was a "vocal supporter" of demonetisation has been given the key post at the country's central bank.

He also hoped that Das stands up to the autonomy and rights of the RBI.

"Anyone who vocally supported demonetisation was wrong. It does not mean that if you are wrong on one issue, you cannot be right on other issues. But you must have the humility and honesty to accept that you made a mistake. Whether Shaktikanta Das has the freedom to acknowledge that demonetisation was a mistake, I doubt that.

"I sincerely hope, and I would appeal to Shaktikanta Das, that you (Das) are now the RBI Governor. You are no longer ex-Secretary Economic Affairs, you are the Governor of central bank of India. Therefore, you must stand up for the autonomy and rights of India's central bank," he added.

Shaktikanta Das took charge as the 25th Governor of the Reserve Bank early Wednesday and promised to take all stakeholders, including the government, along on key policy issues to maintain growth while keeping inflation under check.

Das was appointed to the post on Tuesday, December 11, within a day after the sudden resignation of Urjit Patel following deep friction between the RBI and the government over a host of issues, including the central bank's governance, capital reserves and also certain regulatory policies like the PCA framework for half the state-run banks and credit concerns to some key vote-banks in the industry.

Asked whether Urjit Patel meekly accepted demonetisation, the senior Congress leader said, "He should not have called a board meeting in Delhi.. and passed a resolution endorsing demonetisation. He should have stood his ground. He was wrong. He suffered a huge reputational slide by endorsing demonetisation."

When asked about his differences as then Finance Minister with then RBI Governor D Subbarao, Chidambaram said those were the "usual differences" that Finance Ministers across the world have with their central bank Governors.

He pointed out that Rao never resigned over these differences unlike the case of Urjit Patel who put in his papers on December 10, around 10 months before his three-year tenure could end.

He also said that the RBI suffered a blow to its reputation among the world's central banks due to demonetisation and has not recovered its image to this day.

"Urjit Patel should have walked out on November 19 itself. He delayed his resignation. Perhaps he gave benefit of doubt to the government and thought perhaps the government would retrace its step. But everything that happened after November 19 proved the government was pressing ahead its agenda," the senior Congress leader said.

The former Finance Minister slammed the government for its eagerness to get hold of the central bank's reserves, which apparently became the bone of contention between the government and Urjit Patel and ultimately led to his resignation.

Stressing that RBI's independence is crucial, he said it "worries" him that the government has appointed a perceived "yes man" as the central bank's boss.

"It worries me that they (government) have appointed two persons to two key posts, both of whom were vocal supporters of demonetisation. It worries me," he said.

To a question on what was at the heart of the disagreement between the government and the RBI, Chidambaram said this government thinks it "owns the RBI" and that it is its department.

"It thinks CBI listens to us, why does not RBI listen? This government made the (number) one and two of the CBI fight each other. This government simply does not understand what central bank independence is," he said.

Asked about his analysis of the specific differences between the government and the RBI and whether it was on non-performing assets (NPAs) or if the government is wanting to access RBI reserves, Chidambaram said on prompt corrective action and on liquidity, government does not have the final say.

"It is the RBI which must have a final say. You can present your data. You can persuade the RBI to see that liquidity is required in some sectors. You can present data to say that credit flow is not adequate. But ultimately it is the RBI which has to take the final call on liquidity and prompt corrective action.

"But this government is not interested in that. This government is interested in the hoard of cash lying there. It thinks that there is so much cash is lying there, I can’t meet my fiscal deficit, my GST revenues are less than expected, I have not provided for food subsidy fully and Ayushman programme... what do I do. There is a pot of gold and I want to reach that pot of gold. That is the only aim of this government," he said.

He said demonetisation has first, second and third order effects.

The first order effect was drastic for 15 days but there was an appearance that things will come back to normal when currency started flowing in. The second order effect, which were deeper, was jobs which were lost and never came back. Small and medium industries which were shut never reopened among others, Chidambaram said.

"The third order effect is when there is so much uncertainty about policy that foreign investor pulls out... As we move from first to second and third effect, more people have realised what a foolish decision it was,” he said.

About NPAs, Chidambaram said there were two worse NPA situation in the past -- one when Yashwant Sinha was the Union finance minister, but there was no scare like the present one and the second was during his own tenure, both of which were resolved.

"This government ham-handed in dealing with the NPA situation," he said adding that the solution cannot be one-sided, those have to be classified.