It is a huge relief the RBI and the Government have agreed on certain things, disagreed on a few others, and decided to refer some others to newly-constituted committees. Days of public acrimony that preceded the key meeting, lasting a record nine hours, in Mumbai on Monday, happily produced mutually acceptable compromises and recommendations. Neither side stood to gain from continued recriminations, but the economic atmosphere would have certainly taken a hit if the central bank and the government continued to talk at cross purposes.
Some of the sticking points were remitted to expert committees. For instance, there was much noise that the government wanted RBI to transfer surplus; the RBI didn’t agree. Instead, an expert committee will examine the demand and try and provide a firm framework for the adequate economic capital that the central bank must necessarily maintain. Terms and membership of the proposed panel are to be decided by both parties with mutual consent. The total RBI reserves at the end of June last stood at Rs 9. 6 lakh crores as against Rs 8.38 crores in the previous June. RBI’s foreign assets in the same period stood at Rs 26.4 lakh crores as against Rs 23.7 lakh crores in June last year. So far so good. On the question of loosening the purse strings for the hard-pressed micro, small and medium enterprises, the RBI yielded but only some.
Banks henceforth can have capital adequacy at nine percent as against eight percent previously. Besides, the period for restructuring bad loans up to Rs 25 cores is to be extended by one more year — remember the election season would end by May next year. Again, the RBI doesn’t lose face by a compromise meant to provide relief to relatively small entrepreneurs, especially at a time when marquee names in business and industry are mired deep in bankruptcy proceedings and a forced sale of assets. Larger good of the larger numbers underpinned the relatively minor concession made by the central bank. However, another bone of contention which required urgent resolution was barely taken up at the marathon meeting. It is the question of liquidity in the non-banking financial companies.
Given that the big employment generator real estate sector has come under further pressure following the recent crisis in the NBFCs, worsened no doubt by the gross abuse and mismanagement at the top of the ILFS behemoth, the decision to put off the matter till December 14, when the board is due to meet next, will come as a disappointment to retail investors in the NBFCs and real estate companies. The decision to review the prompt action framework by a sub-committee of the Board is another sop to the government which does not impinge in any anyway on the soundness of the position the central bank has taken all along. In other words, the much-ballyhooed meeting of the central bank ended in a draw. Which is just as well.
Since both protagonists eventually mean well by the economy, though the government, as always, accords priority to populist concerns, while the RBI seeks to defend principled economic positions, such an outcome reflected good sense on both sides. What was heartening was the lack of rank-pulling, since in legal terms the central bank remains subservient to the sovereign, that is, the government of the day. No master-and-slave tantrums here, only businesslike proceedings. Which means that the nth standoff between Mint Street and North Block since its nationalisation in January 1949 has ended to everyone’s satisfaction.
The only difference this time was that the RBI went public with its complaint against the Government. Maybe Deputy Governor Viral Acharya was ill-advised by his boss, Urjit Patel, to air the differences publicly while Patel’s predecessors had learnt to handle the pressures without losing patience. As one of Patel’s distinguished predecessors said, RBI enjoys a lot of independence but what constitutes that independence is for the government to determine. Hopefully, the finance minister, too, will have drawn the right lessons from the spat. Mutual accommodation should always inform dealings between Mint Street and North Block.