Devious agenda to erode RBI's autonomy
The new government should examine the intent of the Financial Sector Legislative Reforms Commission
The Financial Sector Legislative Reforms Commission report has been discussed at some forums but there are a number of issues which create a lot of heat and dust. Raghuram Rajan, Governor, Reserve Bank of India in his talk "The FSLRC Report: What to do and When" (June 17, 2014) provides a benchmark critique of the report which should be carefully absorbed by the Government and legislators.
While the Commission believes that its proposals will bring about increased efficiency of the system, it clearly centralises decision-taking by the Government. The leitmotif of the report goes against the new Government's stance of "minimum government with maximum governance".
While the major recommendations need attention, it is more important to give a closer look to the nuts and bolts. Any doubts expressed about the recommendations result in protagonists of the report denouncing such persons as advocates of the status quo . It is important to delve into a few issues of detail, which shows the antipathy of the Commission to the RBI.
Some of these issues have been discussed in earlier columns but they need to be reiterated in the context of the new Government.
The Commission imposes a uniform structure for all financial institutions, be it the RBI, the Unified Financial Authority (UFA) or the Resolution Corporation.
Structure of the RBI
Each of these organisations will have a chairman and a 'member, law and administration'. More specifically, the nomenclature 'governor and deputy governors' of the RBI would be tossed out of the financial system.
The Commission shows scant understanding of the fact that central banks are unique. None of the other financial institutions/regulators are banker to the Government and have the power to create money. The protagonists of the Commission talk about reforms in other countries and how India is being left behind.
But the protagonists need to answer the question squarely as to whether in any country with a central bank, the designation 'governor' has been altered to 'chairman'.
A ready defence of the Commission would be that the head of the US Fed is called 'chairman', but it is conveniently forgotten that in the US all members of the Fed Board are called 'governors' and the head of the board is called 'chairman' of the board of governors.
Why does the Commission insist on changing the designation of the 'governor'? A rose by any other name smells sweet, but it should be amply clear to all that there is something sinister in the Commission's desire to change designations, and the only reason is to whittle down the role of the central bank.
Again, while setting out the membership of the Monetary Policy Committee (MPC), the Commission restricts RBI membership to two while there would be five external members appointed by the Government and each member would have voting rights. In very exceptional circumstances, the chairman would have the right to use a veto but would have to publicly justify his stance.
Further, the representative of the Finance Ministry would be a non-voting member of the MPC and have the right to be heard. In India, government representatives have an overbearing influence on committee decisions. Responsibility and accountability are executive functions and cannot be discharged by external advisers. To sum up, the proposal of the Commission is clearly to centralise all powers with the Government.
The setting up of an independent Public Debt Management Agency (PDMA) was first mooted in RBI Reports, namely, Capital Account Convertibility (1997) and Transparency of Monetary Policy, chaired by M Narasimham (2000).
Managing public debt
It is unbecoming of the Commission to belittle the RBI's emphasis on fiscal consolidation as a prerequisite for the separation. The separation is not feasible until the Government is able to undertake its borrowing without the help of a statutory liquidity ratio and RBI's open market operations are exclusively for monetary management.
The Commission's proposal stipulates that the RBI would be represented on the PDA Advisory Council as also the Management Committee. It would be incumbent on the chairman of the PDMA to ensure consensus decisions which means arm-twisting the RBI. Furthermore, the PDMA would be, in effect, under the Ministry of Finance which means further centralisation of power in the Government - something that goes against the new Government's philosophy.
The Commission has a peculiar recommendation wherein the Government would be in charge of capital inflows and the RBI in charge of capital outflows - a sure way of creating chaos. The Commission envisages the deposit insurance system to be part of the Resolution Corporation. At present, the gap in resources of the Deposit Insurance Corporation is met by the RBI. If deposit insurance is taken out of the RBI, the Government would have to fill the resource gap. The new Government should tread carefully in this matter.
In the 1980s and 1990s, government-RBI relations were amicable and differences were settled within the family. Since 2003, there has been a prolonged phase of government-RBI friction. The FSLRC report is to be seen against the backdrop of this open conflict, as is reflected in the FSLRC's predilection to subjugate the RBI. The new Government, during its short tenure so far, has brought about a sea change in RBI-government relations. It had best not carry the baggage of the old government. Hence, the new Government would do well to cautiously deal with the FSLRC's recommendations.
Please Note: This article was first published in The Hindu Business Line on July 14, 2014.
This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.
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