Firstpost: New Delhi: Sunday, January 15, 2017.
Of late, particularly after Prime Minister Narendra Modi’s decision to demonetise Rs 500, Rs 1,000 notes on 8 November midnight, the Reserve Bank of India (RBI) has become an object of ridicule and has come under sharp criticism for giving up its autonomy. The institution, which is otherwise regarded as among the few in the country that can claim the highest standards of professionalism and institutional integrity, is now facing flak for giving away its independence in functions and operating as just another department of the finance ministry. Not just by social media enthusiasts, but former RBI governors and deputy governors, economists and now, even RBI staff unions, have lamented central bank’s current plight.
A letter written by various employee unions under the United Forum of Reserve Bank Officers and Employees, to governor Urjit Patel (Firstpost has reviewed the letter), has raised the issue of Modi-government "impinging on RBI autonomy" and has asked Patel to act against the finance ministry’s "unwarranted interference" in its operations. “Apart from showing RBI operations and its gigantic performance in poor light, the government now blatantly encroaches on its jurisdiction, which we cannot accept,” the report quotes the union as saying. RBI's autonomy and image have been dented beyond repair, the letter to Patel says.
“An image of efficiency and independence that RBI assiduously built up over decades by the strenuous efforts of its staff and judicious policy making has gone into smithereens in no time. We feel extremely pained,” the letter says. This isn’t the first instance someone is raising the issue of RBI autonomy in connection with the demonetisation.
Many other noted personalities, including former RBI top brass, have cited the problem of RBI being forced to toe the Modi-government’s line and the danger of an RBI sans its integrity. The chorus began with former deputy governor, Usha Thorat, who in her Op-ed in The Indian Express, wrote. “ “There have been times when the Old Lady of Mint Street was criticised for being too conservative and cautious — for not being able to keep up with innovation and markets — never has she been accused of not knowing her job. Never has she been the butt of as many jokes as in the last few days.” Similarly, Y V Reddy and Bimal Jalan, former RBI governors, too have spoken out in support of central bank’s autonomy.
In separate media interactions, both of them highlighted why the government must strive to maintain RBI’s autonomy in the interest of the larger economy. Jalan was RBI governor between 1997 and 2003, succeeded by Reddy till 2008, followed by D Subbarao and Raghuram Rajan.
The other prominent voice who raised this issue was Nobel laureate Amartya Sen, who in his interview to India Today TV, said “I don’t think this is RBI’s decision (demonetisation). This must be Prime Minister’s ...I don’t think RBI decides anything at this time." This is, in other words, Sen’s way of saying that the central bank has been reduced to an institution operating at the instructions of the central government. Such an image of the RBI wouldn’t help the Indian economy to emerge stronger.
But, demonetisation has probably been only a trigger to expose the change in the working style of the central bank post the Raghuram Rajan era. The RBI leadership under Urjit Patel has so far been a near-failure to carry forward the virtues the central bank has guarded over several decades. There have been major shortcomings on many accounts, some of which Thorat has mentioned in her piece.
As this writer argued in an earlier Firstpost column, the issues that led to the deterioration in RBI’s credibility can be summarised mainly into two issues — lack of transparency and absence of effective communication. Beginning late evening of 8 November, government functionaries have dominated the demonetisation scene with the RBI largely reduced to an agency whose job is to only notify what is already there in public domain.
At a time when the common man was gripped with panic seeing closed ATMs/ bank branches, long queues (which continues to an extent even now) and uncertainty regarding how long the cash crunch situation will continue, the RBI should have addressed the public to calm nerves and offer firm guidance, but Patel chose to remain silent for a long time. About 60-circulars in just one month of demonetisation doesn’t give a sense to the public that the RBI had any plan or conviction about the demonetisation rollout.
Recently, the Bloomberg news reported that the RBI refused to share “specific details” on the government's decision to recall high-value banknotes, citing threat to the country's sovereignty, integrity and security besides danger to life.
This response is perplexing since RBI is the guardian of sovereign currency and the only authority equipped to respond on the details of demonetisation, though note ban was largely a political decision. An RTI query on the same subject filed by Firstpost is yet to yield any response. Theoretically, the central bank is not an absolutely independent organisation, it is answerable to the finance ministry.
As former finance minister, P Chiidambaram writes in his Indian Express column, “The word ‘autonomous’ does not occur in the Act but, over the years, the principle of Central Bank autonomy has been raised to the level of an immutable law. Under Section 7 of the Act, the Central government may give such directions to the RBI as it may consider necessary in the public interest, but the power has never been exercised in the 83 years of the Act.”
For the sake of India’s aspiring economy and its larger democratic ideals, it is vital that the RBI’s autonomy is protected. This is the reason some of the former RBI governors, including those who came from North Block, have had to lock horns with finance ministry in the past on matters pertaining to RBI’s independence. Right now, the duty of regaining the central bank’s lost glory primarily rests with current governor, Urjit Patel, who has so far largely remained silent on the issue. Patel must stand up now to save the stature of the central bank and ensure, the RBI doesn’t become just another extended division of the central government, dancing to its whims.
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