RBI seems to have stymied the Modi govt’s intentions, while giving some concessions

In a normal world, the government is the protector of a country’s institutions of governance, policy and public service. In an alternate universe, the government becomes the predator, cannibalising the core structures of its own foundations that threaten to challenge its suzerainty.

It is not just tin-pot dictatorships or feudal kingdoms that exercise their authoritarian propensities, so do fragile democracies. The latter has the privileged status of ravaging pillars of a democratic polity ostensibly for the larger public interest; it has an electoral mandate that is often flagrantly abused.

India’s central bank, the Reserve Bank of India (RBI) currently faces a sledgehammer attack from the ‘Narendra Modi government’ , the organised attempt to steamroll it is unambiguous. The RBI is in august company; the grocery-list of pilloried institutions include the Central Bureau of Investigation, Election Commission, Enforcement Directorate, Chief Vigilance Commission, Income Tax, National Investigation Agency etc.

To understand the gravitas of the institutional meltdown under PM Modi, it is worthwhile to point out that a senior IPS Officer of the CBI , Manish Kumar Sinha, has called it the “ Center for Bogus Investigation”. Would RBI Governor Urjit Patel have the courage to take on the government or would he succumb pusillanimously? The RBI Board meeting after a marathon 9 hours still left us nonplussed with no clear answers. But one thing was clear, Patel and the RBI were ready for a push-back.

Urjit Patel was subjected to profuse ridicule for his radio silence on Modi’s whimsical demonetization announcement of November 2016. But the RBI has belatedly understood that silence will mean acquiescence with the government’s profligate predilections and will embolden it to stifle its autonomy

The government is ostensibly against RBI’s Prompt Corrective Action ( PCA) , a step that was necessitated following ballooning Non Performing Assets of public sector banks. 11 of the 21 PSU banks have direct proscriptions that prohibit them from aggravating their reckless balance sheets further.

The government’s objections seem irrational if not altogether obtuse given that NPAs have crossed ₹10 lakh crore, and stressed assets are touching stratospheric levels.

Over the last few years it is apparent that the Modi government has been blissfully comatose. Extraordinary situations demands extraordinary solutions. The RBI has insisted on a red flag even if there is a single day’s default by a corporate borrower. It is a legitimate call given the sordid saga of Nirav Modi, Jatin Shah and Mehul Choksi and other shimmering conmen who have committed skullduggery with panache and left the banks hemorrhaged. They are still bleeding, but that does not seem to bother the government. On a TV show in which I was occasionally heard, one market analyst called the PCA a bizarre overreach. In the same breath, he lamented the mind-boggling state-owned bank defaults. You can’t have the cake and eat it too, you know.

The RBI is cognizant of the duplicitous way in which the government is spinning the bank crisis as RBI’s “ due diligence failure”. This is scapegoating and will suit BJP and Modi in an election year where Congress President Rahul Gandhi’s crony capitalism charge and Chowkidar Chor Hai is the popular leitmotif. Demonetisation was never an economic policy measure, it was always about capturing political windfalls. The RBI case is no different.

Urjit Patel was subjected to profuse ridicule for his radio silence on Modi’s whimsical demonetisation announcement of November 2016. But the RBI has belatedly understood that silence will mean acquiescence with the government’s profligate predilections and will embolden it to stifle its autonomy. Hence, the abrupt outburst of Deputy Governor Viral Acharya where he warned of the retaliatory backlash of the markets if RBI’s regulatory powers were stripped bare.

To make an omelet, you have to break eggs. The RBI knew that the November 19th meeting was a litmus test, if they allowed the government to browbeat them into submission now, it is all over. They needed to break those eggs. They seem to have stymied the government’s unconscionable intentions, while seemingly giving way on some concessions the government wanted.

With barely five months to go before the general elections, it seems incongruous that what the government failed to do in four and a half years, it hopes that RBI will transmogrify overnight by providing higher liquidity to NBFC’s and by having a special window for Micro Small and Medium enterprises.

This is blatant political chicanery; Modi needs to acknowledge that the MSME sector was lacerated because of the atrocious demonetization and the ineffectual implementation of the Goods and Services tax ( GST). The ILFS catastrophe happened right under the nose of the government. These are just superficial efforts to make the government’s self-inflicted blunders look like RBI’s bad hair days. It also camouflaged the real intent of the government which was to appropriate part of RBI’s accumulated reserves which are at a staggering ₹ 9.6 Lakh crores.

The entire elaborate charade was to emaciate RBI’s operational independence and reduce the profitable entity into an ATM for the government, cash at call. It is myopic, flawed and politically immoral. Urjit Patel had to resist this at all cost. The deliberate mention of Section 7 of the RBI Act was to remind him that there is a Damocles sword hanging precariously over his head.

By forcing a status quo on the Economic Capital Framework (which decides on surplus capital transfers to the government and was the principal apprehension) pending review by an expert committee, Modi cannot get access to RBI’s reserves for a populist spend, which RBI needs for meeting several unpredictable external contingencies. As of now, the storm seems to have blown over. But this could still just be a temporary truce. But if forced to the corner tomorrow , Urjit Patel must quit and go public. Like Raghuram Rajan, his predecessor did. Political parties will come and go but institutions are forever.

(Sanjay Jha is the National Spokesperson of the Indian National Congress party and President, All India Professionals Congress. The views are his own).