Modi, Patel(s), RSS, Cash, Statue... Err Statute!

Two huge stories broke last week. Both had identical ingredients, except for a tiny ‘t'. One was about a Statue, the other about a Statute.

Prime Minister Modi helmed and orchestrated both the stories. In the first one, he redeemed his 6-year-old pledge to build the world's tallest statue on river Narmada, a 182-meter salute to Sardar Patel, an icon of India's independence movement. In the second but bigger story, Modi threatened the Reserve Bank of India with a surgical strike.

Both stories pivoted on Patels, the Sardar in one, a Guv'nor in the other.

The Sardar had a beef with the RSS in the first story. He was wary about its religious and cultural nationalism. He had banned it after Mahatma Gandhi's assassination.

Raghuram Rajan destroyed the RBIs independence by making it subservient to global thought rather than pursue India centric solutions. The RBI can't now move away from that line for fear of going against global financial opinion. RBI has lost its capacity to think for India https://t.co/sTMLddKbrW

Unfortunately, this was no longer the rant of an outsider. Gurumurthy was para-dropped into RBI's board shortly thereafter and a much-respected commercial banker rudely sacked. Guv'nor Patel, like the Sardar 70 years ago, now had to battle a Hindutva (economic policy) insurgency in his front yard.

Then there was a cash—a big cash—overhang across both the stories. One needed Rs 3,000 crore to melt, mould, and erect 95,000 tonnes of construction material. In the other, an electorally spendthrift Modi government was eyeing the Rs 3 lakh cr of surpluses built over decades of prudent profitability. It wanted RBI to gift it a windfall equal to two percent of GDP, damn the weakened balance sheet. Argentina's plight, after it had denuded its central bank's reserves by nearly $ 7 billion, was ignored. Warnings by renowned economists to keep a strong RBI cushion against India's chronic current account deficits fell on deaf ears.

The cash hoard that had eluded Modi in demonetisation was sought to be compensated by raiding its own central bank.

The Difference An Innocent Little ‘t' Can Make!

The Statue, even if extravagant, is still a force for the good. But the Statute is a constitutional nuclear button, which the founding fathers had inserted under India's ‘no first use' doctrine. It's meant as a deterrent, hopefully never to be deployed, except in the rarest of rare emergencies.

Remember, Section 7 of the RBI Act allows the government to force consultations; okay, so far so good. But the scary part is that it also enables the government to direct the RBI to do its bidding. Poof! It's such a malignant provision that it's never been used by any government, not even during famines (1965) or wars (1965 and 1971) or near bankruptcy (1991) or global recession (2008).

Because Section 7's casual or frequent invocation can demolish the most cherished principle of economic governance – a central bank which independently makes monetary policy for the long-term interests of the nation, without surrendering to the short-term whims of a government looking to inject a temporary, and false, feel-good factor among people.

And certainly not just a few months before tough elections, perhaps as one more tool to neutralise an anti-incumbency sentiment.

The Beef Between The Modi Government And RBI

Now to be fair to the Modi government—believe me, we always try to give it the benefit of the doubt—let's critically assess its beef with Guv'nor Patel, one slice at a time.

1. Consensus On A Dividend Policy

Perhaps the RBI should not have surprised the Modi government by slashing the dividend from the budgeted Rs 66,000 cr to Rs 30,000 cr last year. Now they should use this crisis to kill the dividend/surplus friction by agreeing to a ‘smooth dividend' policy, using RBI's stout reserves.

2. Provisioning On A One-Day Default

The government and several bankers see this requirement as unusually strict and impractical.

But for a system which has been so lax and prone to ‘evergreening abuse' for decades, perhaps the RBI was justified in using a ‘shock and awe' tactic to force compliance.

Also, the government's entreaty to exempt power companies from these provisions is contrived and lazy; reforming the power sector is the government's problem, not RBI's.

3. Regulation Of Public Sector Banks

Here too, the RBI has got a strong case. Most of the rot is in PSBs, which are controlled by the government, with some token presence of RBI nominees on a few committees and boards. Recall how Prime Minister Modi was vocal about “phone calls from UPA ministers” that had “destroyed PSBs”. Then why is his government preserving such a pernicious structure?

Why is Modi not giving RBI unambiguous control of PSBs, in much the same way that private banks have been put under the regulator?

4. Prompt Corrective Action

This is similar to the stress tests that American and European regulators performed on systemically important financial institutions after the 2008 debacle. Under PCA, nearly half the PSBs and one private bank have been restrained from giving new loans until their balance sheets are repaired. This has quarantined almost a fifth of all advances; the government believes this has severely restricted the flow of productive credit and hit growth. But here again, the RBI is on the point.

It cannot allow the financial sector to get dislocated by rogue loans from fragile lenders.

If anything, the responsibility of recapitalising weak banks has to devolve on the principal shareholder and controller, which is the government!

5. Payments Regulator

The government wants to create a separate regulator for payments and settlement systems. Quite correctly, the RBI is objecting vehemently to an unconscionable trimming of its remit/turf.

There are several other pinpricks, but all the major flashpoints are listed above. On four out of five, the RBI's case is stronger.

The Furtive Sixth, Most Diabolic, Standoff

But I can now detect a ‘furtive sixth point', which could end up being the most diabolic, getting inserted into the RBI/government standoff. Let me quote S Gurumurthy again: “The RBI Act itself says the management of RBI is entrusted to the board, with the Governor and the deputies being mandated to exercise management powers subject to the board's directions” (emphasis mine).

I hope I am wrong, but I see a sinister attempt at ‘power creep' here: to enhance the scope of RBI's board from management/administration to overseeing policy. To reduce the Governor to ‘just another member' of the RBI board, a bit like the position of a Managing Director on the board of a public company.

This is blasphemous! It must be fought tooth and nail. The RBI Board is not a policy making/approving entity, which is the responsibility of the Governor and the Monetary Policy Committee, or MPC.

Since a powerful RSS ideologue is pushing a different line, we need to be vigilant. And ensure that the RBI Board meeting on November 19 does not attempt a misadventure or create a miscarriage.

So, Guv'nor Patel, please stand firm. Do engage with the government and accommodate their sensible inputs. But don't give in. Or quit. This is a moment of institutional truth/sanctity. Hold your ground.

And please don't respond to this tweet:

Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?

This is not a schoolboys' social media squabble!

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of two books, viz ‘Superpower?: The Amazing Race Between China's Hare and India's Tortoise', and ‘Super Economies: America, India, China & The Future Of The World'.

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