NDA Ministers Blast RBI Functioning Under Patel, Led By Jaitley

Under fire for the surprise resignation of Urjit Patel as Reserve Bank of India governor, senior Union ministers went on an offensive, decrying the central bank’s policies as “unreasonable” and also justified the discussions under the never-before-used Section 7.

The counter was led by Finance Minister Arun Jaitley himself, who, while admitting that the government has issues with the central bank on credit flow and liquidity, said the government has began “discussions” with it to rectify the same.

“We are the sovereign, we are the most important stakeholders as far as the management of the economy is concerned,” Jaitley told an economic summit organised by the Times group. It’s because of these issues the “discussions” have been initiated with the RBI, he said.

Though Jaitley did not explicitly mention it, the discussions he was alluding to were under Section 7 of the RBI Act, through which the government of the day can force down certain policies for the central bank to implement, citing national interest.

Patel quit on Monday citing personal reasons, following months of open spat with the government which wants the RBI to take a slew of measures to push growth, including those on liquidity flow, support small businesses and also the central bank’s capital management.

Coal Minister Piyush Goyal, who had manned the North Block when Jaitley was on medical leave, hit out at the RBI for making “unreasonable” amendments to the framework, referring to the banks under the prompt corrective action framework, which prevents them routine lending activities and is another pain area for an election-bound government

“The PCA is akin to changing the ground rules halfway through a cricket match,” Goyal said, underlining that the decision was taken by the RBI without a go-ahead from its central board or government.

It can be noted that most of the 18 RBI board members are government nominees who are mostly businessmen who have business interests in the field of finance while some are vocal BJP ideologues.

It can be noted that governance at the RBI is another matter of friction between the two, with the government wanting a greater role for the 18-member board rather than leaving policy-making to the RBI management alone.

Goyal said the original PCA framework was concerned only with the capital adequacy as the key determinant on whether a bank goes into PCA, but the RBI abruptly added other factors, including the “worst condition” of two years of profitability.

Goyal told the audience it’s “your money” lying with the RBI and reminded of the U.S. government actions in bailing out banks after the 2008 global financial crisis to say that India also wants to improve the conditions of the banks through the excess capital.

Goyal, who also is the rail minister, termed the speculation about the government wanting to use the excess RBI capital, which is around Rs 9.6 lakh crore, for bridging the fiscal gap as a “canard”.

The RBI board had decided to review the PCA framework in what was seen as ceding the ground after a marathon board meeting on Nov. 19. The RBI was wanting to err on the side of caution and avoid creating any precedents, especially those which weakened its fight against NPAs on a majority of the aspects.

It can be noted that the poll-bound government has already overshot its full year fiscal deficit target by 4 percentage more than budgeted as of October as indirect tax collection has been below target on one hand and failing on the non-tax revenue side by a wide margin-divestment proceeds has so far been only around Rs 15,000 crore year-to-date against a target of Rs 80,000 crore.

Patel’s resignation has been criticised by the opposition as the government bid at denigrating key national institutions.

Union Roads and Shipping Minister Nitin Gadkari also hit out at the government critics, asserting the government has not “destroyed” the RBI. He, however, said there is a need for it to support the economic policies of government, arguing the RBI is part and parcel of the government that runs the nation.

Jaitley quoted from a letter by Jawaharlal Nehru to the then RBI governor Rama Rau, saying the first prime minister wanted economic policies to be conducted by the government and RBI policies must be in tandem with the government. The issue led to Rau leaving the office in protest.

Jaitley said initiating discussions on an issue cannot be termed as a “destruction” of an institution.

Jaitley also listed out past instances, saying Congress prime ministers Jawaharlal Nehru and Indira Gandhi had asked RBI governors to resign, and so did BJP leader Yashwant Sinha with then governor RN Malhotra, while P Chidambaram was not on talking terms with the then governor.

Jaitley went on to claim that he had good relationships with both Patel and Raghuram Rajan, who was not given a second term.

Goyal said the U.S.-based academic is looking for a “political career and should announce” it soon, replying to Rajan’s concerns following Patel’s resignation.

Goyal said former Chief Economic Adviser Arvind Subramanian’s use of the adjective “draconian” for note ban should not be read as a criticism, claiming the adjective is used to drive home the point that demonetisation was a “strong measure”.