The ongoing tussle between the government and the RBI regarding various issues has seen a new turn with the resignation of Urjit Patel as the RBI chief and paving the way for the appointment of Shaktikanta Das, a former economic affairs secretary at the Finance Ministry, for the top job. The monumental decision of carrying out demonetisation by the government was highly criticized for bad implementation on the RBI’s part and thus things were inevitably bound to go south. With elections round the corner the government wants to carry out big public expenditure to boost growth and crowd-in investment and for that, it needs funds and hence is looking at the RBI reserves. This can be reinforced by the fact that the GST revenue collection has declined for the second consecutive month in December to Rs.94,726 crore from Rs.97,637 crore in November and Rs.1,00,71 crore in the previous month. The recent relaxation of the GST norms implies a further plunge in the revenues. Despite the repeated denial by the Finance Minister, Mr. Arun Jaitley, that the government does not require the surplus of RBI, the rumour has it that they are looking forward to it and are also pushing for higher liquidity by having the RBI loosen its monetary policy. The government was also apprehensive of the prompt corrective action(PCA) framework for the stressed banks which it claims has led to lending restrictions and has hurt credit growth. First time in the history of independent India, the government invoked section 7 of the RBI Act that lets the government to issue directions to the RBI.
The debate of the autonomy of central bank revolves around the fact that if monetary policy is handled by the government, it will give larger weight to the short term goal of higher growth and employment for pleasing their electorate and thus infuse inflation by increasing the liquidity in the economy which calls for an institution that can take monetary policy decisions independently. That said, fiscal policy cannot be divorced from monetary policy and they have to go in tandem with each other.
Dr. Patel’s resignation came a few days after the fifth bi-monthly monetary policy meeting where it continued to maintain the stance of calibrated tightening, while the market was expecting the rates not to be changed, it did expect the RBI to soften its stance given the fall in crude oil price and moderate inflation. Dr. Patel gave the justification that this was done to buy more time to pause, reflect and undertake future policy action with more inflation signals, he maintained that if inflation risks don’t crop up then rate cut might be a possibility. The fall in GDP in the fourth quarter did not motivate the MPC to cut rates or change their stance to stir growth. This clearly did not augur well with the government which was already pressing the RBI to ease the lending rules under prompt corrective action framework among other demands, to reduce the pressure on Micro, Small and Medium Enterprises (MSMEs) but the central bank was determined that this move was very much required to blot out the mess the non-performing assets have created.
The road ahead seems a little bumpy for the RBI with the government pressing for more liquidity and funds before the elections due in May. The economy is facing huge challenges: stagnant employment levels, low credit generation, volatile capital and rising current account deficit. The problem of liquidity deficit in our economy has to be considered with great caution so as to not infuse excess liquidity but at the same time, the RBI has to remove the shortages to avoid spikes in borrowing rates. There have been small signs of relief in the non-performing assets side that has resulted from the PCA framework but these improvements have to be sustained for a healthy financial system. The RBI has also recently set up a committee under the chairmanship of former RBI Governor Bimal Jalan to examine how much the RBI needs to maintain its reserves, and how much can be transferred to the government.
In his latest statement, Mr. Das has said that no decision has been taken on the quantum of the interim dividend to the government. Although in his maiden address to the media he had assured that he will do everything possible to maintain the autonomy of the central bank, he will have to be on his mettle to prove the same given his history of being a bureaucrat and also being the face of demonetization: defending and explaining the action of the government.