RBI vs govt: What Modi should have done

All that Mr Modi needed to do was to call Urjit Patel over for a cup of tea and ask him nicely, and this fuss would never have happened, recommends T C A Srinivasa Raghavan.
Illustration: Dominic Xavier/Rediff.com

Here's something that the Congress party's spokespersons should be mindful of: There has not been a single governor of the Reserve Bank of India -- with the exception perhaps of K R Puri during the Emergency -- with whom the government has not had differences of opinion.

Given that the party was in power for 60 of the 71 years since 1947, it should not claim any special virtue in dealing with the RBI.

Another thing they should keep in mind is that a government doesn't actually have to use an enabling provision in the law to have its way.

Thus, when senior Congress politicians -- you can't call them leaders -- harp on how they never used Section 7 of the RBI Act, which allows the government to order the RBI to do or not do something, there is no great forbearance to be claimed there.

There has never been a single occasion when the government did not get its way when it really wanted it.

Whether it used Section 7 or not is immaterial.

Some explanatory words about Section 7 are necessary here.

First of all, it is based on Section 4 of the Bank of England Act of 1946, which was the first salvo fired by the socialist government that had replaced Winston Churchill's Conservative one in 1945.

The Introduction to the nationalising 1946 Act says it was 'an Act to bring the capital stock of the Bank of England into public ownership and bring the Bank under public control, to make provision with respect to the relations between the Treasury, the Bank of England and other banks and for purposes connected with the matters aforesaid.'

Section 4 (1) says, 'The Treasury may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, they think necessary in the public interest.'

The key point here is that both the Bank of England and the RBI were privately owned then.

Politicians in both the countries felt the need to introduce the idea of 'public interest' into the financial sector via their respective central banks.

The idea of sovereign power was thus explicitly injected into the financial sector.

But then the question arose: If something went wrong as a result of a direct order from the government, who would take the blame?

Despite the insistence of the RBI that the government should accept responsibility, the issue has never been satisfactorily resolved.

The only concession made by the government was that it would not issue an order without 'prior consultations'.

Whether these consultations are conducted nicely or under the aegis of Section 7 depends on the RBI governor.

If he or she gets obdurate about something, the government is well within its rights to use the section for consultations.

That this has not happened so far is cold comfort.

It is not at all clear why this clause has been retained after the RBI was nationalised in 1949.

Even without it, as we have seen since 1935, the RBI's 'independence' is notional. Or, as one governor put it, the RBI is independent within the limits set by the government.

Thus when the government wanted to raise the credit limit to Sanjay Gandhi's Maruti from Rs 10 million to Rs 20 million in 1974, and the RBI refused, the government simply appointed a pliant governor when the incumbent's term finished.

The same thing had happened thrice before, once as early as 1937.

Pliant governors have been the norm rather than the exception.

Section 7 is thus redundant.

Indeed, even without a pliant governor, if the prime minister says 'please', whatever the government wants can get done. This has happened several times since 1947.

In the final analysis, government-RBI relations have always boiled down to the ego of the governors.

Easy-going men have turned into fierce votaries of independence, especially towards the end of their tenures -- or if they were not seeking extensions.

It is a peculiar older brother, younger brother relationship in which a soft word from the older brother is all that is needed to persuade the latter.

I think this is where the Modi government went wrong.

All that Mr Modi had needed to do was to call Urjit Patel over for a cup of tea and ask him nicely, and this fuss would never have happened.

On the other hand, if he did do that and Mr Patel remained unmoved, well, then all bets must surely be off.