A liberal democracy is characterised and safeguarded by its institutions. The Indian Constitution provides elaborate provisions to firewall independence of institutions such as the Supreme Court, Comptroller and Auditor General and Central Election Commission by including an elaborate impeachment procedure and ring fencing salaries.
Article 124 in case of Supreme Court judges and Article 125 in case of CAG provide for this protective armour. While the constitution contains elaborate provisions for its fiscal policy, budgeting, borrowing and contracts at Part XII, it does not provide similar details on monetary policy and credit architecture.
The RBI Act was introduced for “management of currency and exchange, free from political influence”. Even the British felt the monetary system of a country should be independent of government control. The RBI Act was amplified in 2006 to include financial instruments such as derivatives, repo and reverse repo rates.
The repo rate has become the talisman for cost of credit and liquidity in the Indian banking system. The RBI Governor is the prima donna for determining the repo rate as he has veto power over his four deputy governors.
Even in the US, where the Federal Bank Governor does not have such vote, as Alan Greenspan writes in his book ‘The Age of Turbulence’, the Governor has de facto supremacy. Most important, he is completely unhinged by Congressional interference.
The Indian monetary system has of late been bedevilled by a combination of “twin imbalances” and high repo rates. Twin imbalance refers to a combination of high level of non-performing assets (NPAs) with public sector banks coupled with proliferation of stressed assets of corporates.
As is well known, the corporate lobby pitches for lower repo rate, which has significant implication on fomenting inflationary pressure in the country. India was witness to such an inflationary spiral of more than 10 per cent and food inflation of more than 15 per cent during 2012-2015.
Rajan has been persistent with targeting inflation as his primary focus. The Economic Survey 2015-16 has appropriately complimented him for containing CPI around 6-7 per cent during 2015-16, despite an erratic monsoon. There is, however, a school of thought which believes that Rajan overlooked growth while targeting inflation.
This is indeed a dilemma for any banker, as the supply side constraints can be best handled through fiscal interventions such as taxation and public investment.
While the RBI Act provides for repo rate determination as an in-house exercise of the RBI, the Fiscal Legislative Stabilisation Committee (FLSC) under justice Srikrishna in 2014 had recommended that the repo rate should be determined by a Monetary Policy Committee with significant presence of government representatives.
This was perceived by many discerning analysts as a move towards emasculating the independence of the RBI by foisting business interests on the independent professional body through the mandarins of the finance ministry.
Thanks to the controversy it generated, the parliament has now approved a committee where Reserve Bank Governor will have primacy of opinion, should there be a tie.
The major bottleneck that bedevils the banking sector is the burgeoning of NPAs (Rs6.1 lakh crore). This is a result of a combination of lack of due diligence while sanctioning loans and unforeseen developments such as Supreme Court judgment on coal allocation.
A World Bank study (2015) clearly demonstrates how India’s low standing on the ‘Ease of Doing Business’ globally is largely due to its inordinately long time taken (above five years) to enforce contractual commitments and to effect recovery from defaulters as against less than 6 months in most emerging market economies such as Singapore and Taiwan.
The Supreme Court has, therefore, shown remarkable alacrity to bring the issue of mounting NPA to the centre stage. And the RBI Governor’s ‘Asset Quality Review’ has put the cat among defaulter pigeons. The SBI Chairman is taking a lead to ensure that the real defaulters are monitored through a separate shelf.
This is understandably creating ripples among big corporate, who have a cosy relationship with the government in power. Vijay Mallya’s escape to London despite his heavy default is symptomatic of this uneasy alliance.
Francis Fukuyama in his book ‘Political Order and Political Decay’ brings out how rule of law is often queered by ‘clientism’. Besides, mechanical application of law afflicts the lower rungs of the society, in particular, leading to significant decay of political systems.
India seems to have descended into this political decay. There is an overwhelming body of opinion which seems to deeply deplore Rajan’s exit; in view of his lack of fiscal fickleness and global feel of the vicissitudes of financial markets. His last book ‘Saving Capitalism from the Capitalists’ implores nations to abdicate easy money policy, lobotomise banking and bolster growth by building lasting assets.
It is a classical mix of Keynesian prescription for public investment and Friedman’s hawkish approach to money supply. Rajan is a firm believer in the dictum of perfect competition as opposed to the political tendency towards patronising an oligarchy.
It is, therefore, fascinating to read Professor Luigi Zingales’s observation “that Rajan is being attacked for fighting crony capitalism”. The murky machination of the Modi government has turned sound economics on its head.
The emergency of 1975 raised the bogey of committed judiciary. It was triumphantly repulsed by the Supreme Court through key judgements.
The court has also consistently supported the CAG for their audit finding in the Spectrum and coal block allocation. It is unfortunate that our Constitution does not have a provision to insulate appointees such as the RBI governors from the chicanery of clever politicians, wily businessmen and pliant bureaucrats. Rexit is indicative of a move towards committed banking.
The author, a former joint secretary with the Centre, teaches constitutional law.
