The middle path

The middle path

Core issues in government-RBI conflict are not insurmountable. Wise leadership is needed

The public spat between the government and Reserve Bank of India, after a speech by the central bank’s deputy governor, Viral Acharya, risks degenerating into a spectator sport. The sovereign has invoked a legal provision in the RBI Act which has never been used in the past to push the bank to boost lending to the liquidity-strapped Non Banking Financial Companies (NBFC) sector and to ease lending restrictions on almost a dozen state-owned banks. Recent reports, however, that the RBI Governor met both the prime minister and finance minister and indications that attempts are underway to address some of the concerns raised by the government over the last few weeks, are reassuring. There have also been calls from experienced policymakers for both sides to pull back.

The ongoing conflict is being positioned in problematic ways, with the yielding of policy space on either side portrayed as a victory or a climbdown. It is not as if the core issues in the current conflict are insurmountable. For instance, there is merit in easing the funding tap for small and medium enterprises, a large number of which have been hurt in the wake of the government’s decision to withdraw high-value notes in November 2016 and the subsequent slowdown and also ensuring more liquidity, even if indirectly, for NBFCs, which had filled the void over the last couple of years when many banks had applied the brakes on lending. Surely, there are ways of addressing the RBI’s concerns on providing a special window for NBFCs given the danger of making a distinction between firms which had managed their balance sheets poorly and those which have a genuine case.

The contentious issue of fixing the appropriate Economic Capital Framework of the RBI goes well beyond a narrow accounting perspective of what constitutes profits and the right level of capital or reserves. What many overlook is that some of the gains are on account of valuation of the securities which the central bank holds against the pile of foreign exchange reserves and revaluation of its assets. This and some of the other contentious issues cannot be reduced to either-or positions. The prudent course would be to adopt a middle path and get the board to constitute an expert committee to work out the capital framework and stitch an agreement like the one this government signed with the RBI on a monetary policy framework.

Over two decades ago when Tony Blair’s government ceded operational independence to the Bank of England, Prime Minister Blair described it as the biggest decision in economic policymaking since the war and a decisive act of leadership aimed at the long term interest and prosperity of the country. Hopefully, leadership qualities will be on display early next week when the RBI board meets.