Now that Modi 2.0 Government is sitting pretty in the saddle of the Union Government, with a huge majority in the Lok Sabha, and thus, does not really have to care about the other constituents of the NDA, the captain, Prime Minister Narendra Modi and his close confidant, Union Home Minister and BJP President Amit Shah, have taken the drivers’ positions and have started navigating the nation’s destiny. Right at the outset, Modi stirred the hornets’ nest by opening the uncalled for debate on ‘One Nation-One Election’ formula. On the other hand, Shah made a comment that clearly indicated that Modi 2.0 is out to abolish Article 370 that provides a special status to the northern Himalayan State of Jammu & Kashmir. Shah mentioned that inclusion of Article 370 was a temporary provision and has lost its relevance now. This is a debatable issue, and thus, needs a separate thinking process.
However, apart from ‘One Nation-One Election’ and ‘Article 370’, there are other major issues before the Union Government and one of them is the status of the Reserve Bank of India (RBI). The RBI — the top government bank of the Indian Union — always enjoyed a special status compared to other government, nationalised, cooperative, private and international banks. In this context, Viral Acharya’s departure as a deputy governor of the Reserve Bank of India is worrisome, though not altogether surprising. Therefore, it is necessary to examine the background and the possible fallout of this event.
Part of the process?
First, let’s examine whether Acharya’s decision to step down about six month before the end of his tenure was just an event or a part of the process. Last October, Acharya delivered a hard-hitting speech on central bank independence. While that ostensibly dealt with Argentina in 2010, the thinly veiled similarity with Delhi’s plan to raid the Reserve Bank of India’s balance sheet didn’t fool anyone, least of all an embarrassed and angry government. Though unfortunate, Acharya’s announcement was surely not shocking for the financial circles. A standoff over the government’s intentions was temporarily resolved by pushing to a panel of experts the question of whether the RBI had excess capital and could return some of it to the finance ministry. That didn’t prevent the central bank from losing autonomy in other ways. Governor Urjit Patel abruptly left in December, and was replaced by a former civil servant. The scope for dissent on the RBI’s six-member monetary policy committee, of which Mr Acharya was a member, shrank.
The Union Finance Ministry and the RBI are, mostly, off late, singing from the same prayer book. And that may not be a bad thing in the short run considering that a liquidity-constrained economy has staggered under an unfolding shadow-banking crisis, something that an inflation-focused RBI almost completely missed. Even Acharya, who was arguing his dissenting position of “no-rate-cut” as late as April, reluctantly cast his vote with the majority when it lowered benchmark borrowing costs again in June. Here, the RBI isn’t blameless. Yes, the government has played fast and loose with GDP data; it shied away from reforming the governance of troubled state-run banks, and didn’t like it when the RBI, as the banking regulator, tried to discipline them.
The Union Government also saddled the monetary authority with a chaotic currency ban. Yet the central bank’s own repeated modelling failures and maladroit supervision of financial firms have also weakened it.The efficacy, and indeed the very survival, of the country’s fledgling inflation-targeting regime is in doubt. Raghuram Rajan, the former governor who originally proposed the framework, wanted stable inflation expectations at home to spur greater use of the Indian currency abroad, leading to a permanent drop in the country’s cost of capital. That longer-term goal may also get jettisoned.
For now, all this may not matter. With the US Federal Reserve looking set to reduce rates, India, too, can afford to be adventurous with monetary policy to help paper over the cracks in its shadow banks. If that revives even an impression of growth, global investors will come in droves, especially when there’s not much yield anywhere else. However, this is the third hasty departure in three years of a top-ranking Indian central bank official who openly disagreed with New Delhi.
Ideological Consonance
If perfect ideological consonance with a fiscally irresponsible government — a structural feature of India regardless of who’s in power — becomes a prerequisite for a leading role at the monetary authority, then one day, when markets are less forgiving, India will find itself lacking in credible institutions. Acharya says he’s resigning six months prematurely for personal reasons, which may include a desire to return to the faculty of New York University for the fall term, according to reports in media. But if the government goes ahead and helps itself to a dollop of the RBI’s capital, investors will draw their own conclusions.
The Union Finance Minister, Nirmala Sitharaman, who recently took over the reins of the most powerful ministry, has to immediately pay attention to this crisis. Perhaps, both Modi and Shah would not think of this development as ‘crisis’ as none of them are ‘economists’. Thus, they would take every issue as ‘political’ and would prefer to deal them with political yardstick. However, exit of Acharya, unlike his two predecessors, does not have political overtone. This issue cries for special attention and skill to resolve it.
The writer is a political analyst and former Member of Parliament (RS).
