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RBI Autonomy and Demonetization
Brig (Retd) G B Reddy
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Posted in Publishaletter.com By :
Brig (Retd) G B Reddy
Letter to the Editor Sent to :
RBI Autonomy and Demonetization
Dear Editor: RBI Autonomy and Demonetization “Lambs majority are whilst in service; and Tigers they emerge out of service” aptly sums up the sordid state of affairs. If the controversy over RBI autonomy and demonetization has taken highly controversial turn, it partly explains the reason. What are the realities from the point of view of the common man? As per RBI Act, 1934, general superintendence and direction are taken care of by “Top Heavy” Central Board of Directors: 21 members comprising the Governor, 4 Deputy Governors, 2 Finance Ministry representatives, 10 government-nominated directors to represent important elements of India's economy, and 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. First, YV Reddy (2003 to 2008) told The Wire that “The RBI figures after the army in terms of perception as a custodian of society’s trust. Central bank is regarded as a custodian of society’s trust in money and finance.” Y V Reddy expressed strong reservations on damage to RBIs “institutional identity” and “reputation.” “Sacrosanct” stated Bimal Jalan (1997-2003) on RBI autonomy. On the demonetization issue, initially five former Governors of the RBI had more or less expressed grudgingly guarded but positive views. The irrefutable fact is the Government proposed to demonetize Rs1000 and Rs500 currency notes. And, the RBI’s board approved it before the public announcement by the Prime Minister on 8 November 2016. Less publicized is that the design of new banknotes of Rs500 and Rs2000 denominations was approved at the 19 May 2016 meeting of the Central Board RBI. Let me first review the issue of RBI autonomy. Following RBIs statements before the Parliamentary Committee that only a day’s notice was given to execute the decision, Bimal Jalan and Y V Reddy highlighted that decisions like demonetization fall in the ambit of the RBI domain. So, RBI insiders and some central bank watchers believe that RBI’s autonomy is under siege by the current Modi led NDA regime. However, this is not the first time that the RBIs autonomy has been undermined. Over the years, there have been many instances when the government of the day has nudged the RBI and its governor to make a decision not to their liking. Of course, YV Reddy has conceded that it is the Centre’s prerogative, as a sovereign, to take the decision to demonetize. However, he would have told the prime minister that it was impossible to effect a quick replacement of currency on such a massive scale. He was clear he wouldn’t have resigned because he cannot per se question the decision of the sovereign. “That would not be in order. However, I have every right as a professional to withdraw from its implementation,” said Reddy. Importantly, Ajay Shah, a professor at the National Institute of Public Finance and Policy, pointed out that Section 7 of the RBI Act empowers the government to give directions to the central bank governor in matters of public interest. According to Shah, the only areas where there is a need to keep the government out are when the regulator is issuing a license, investigating someone or setting policy rates. As regards the reputation of the RBI, let me highlight that it stands totally tarnished what with its abysmal failure to monitor the banks functioning. Surely, every customer must be concerned about 28 state-owned banks writing off a total of Rs 1.14 lakhs crores of bad debts between financial years 2013 and 2015 to big business houses like Vijaya Mallya, Sahara etc. K C Chakrabarty, former Deputy Governor of the RBI handling the department of banking supervision, stated “I have already said write-offs are a big scam. All confusion is about technical write-offs. There is no procedure or no policy for technical write-offs.” Almost all banks invoke “Commercial Confidence”, trade secrets or intellectual property of third party to justify secrecy over writing off loans and disclosures. Adducing the list, the RBI said it was “extremely necessary” to keep these names confidential due to their “fiduciary relationship”. Chakrabarty also said banks cannot deny information on loans being written off to owners, shareholders and the regulator. “For example, the Bank of England publishes sector-wise write-offs.” Surely, the RBI cannot shed its responsibility and accountability for bad loans – abject systems collapse. After all, the primary objective of the Board of Financial Supervision (BFS) is external monitoring and internal controlling systems, monetary supply and FEMA. The BFS is also to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. Furthermore, the BFS is responsible to oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues. Also, each of RBI local boards consists of 5 members who represent regional interests, and the interests of co-operative and indigenous banks. In retrospect, the larger public interest or good has been the least concern of former RBI governors. Why? So what, if loans are written off under the discretionary power of “Competent Financial Authority or Committee” of respective government Banks? Surely, the RBI Governors should have taken prompt action against defaulting competent financial authorities of various banks. Following the demonetization announcement, Dr. C Rangarajan (1992-1997) termed it as ‘standard prescription’ tried in the past; but failed to stem the rot of corruption. Bimal Jalan termed the demonetization drive as positive/good “in terms of what the intention is and it would take three-four months to see how it works.’ Initially, even Y V Reddy hailed the initiative as historic, and endorsed the decision taken by the Modi government. He even termed the timing of the move “perfect” as it comes right before the Goods and Services Tax (GST) is all set to be implemented. D. Subbarao (2008-2013), stated “it will affect the retail trade as most of the transactions are done using cash. There are some other sectors in the economy like real estate, jewelry where cash has become a major player for transaction. Those will undergo a fundamental change.” If you ride out the short-term pain, the positives will be substantial, be in terms of attracting investments, and also getting people to move from physical cash to electronic transactions.” Dr. Raghuram Rajan (Sept 2013 to Sept 2016) hasn’t commented on the current drive. But on an earlier occasion, he had raised doubts about the effectiveness of demonetization as a way of cleaning the financial system of black money. At the recently held debate at Davos World Economic Forum, the two Harvard Economic professors opined that demonetization was a good move and its final outcome depends on its effective implementation. Most important it is to note that the printing of Rs.2000 notes had commenced sometime in June 2016 during Dr. Rajan’s tenure. Surely, the intent to replace Rs.1000 notes was initiated during Dr. Rajan’s tenure. The government justified its decision to give one day’s time to the RBI on the need for secrecy to achieve the three end objectives including fake money and terrorism. In sum, the controversy over RBI autonomy is a bogey. If any, successive RBI Governors are to be blamed for tarnishing the image of the institution not only by towing the line ruling regimes but also abysmal failure to effectively discharge their function of monitoring the bad loans given by various financial institutions. In fact, no institution can claim to enjoy autonomy in today’s India. Politicization is virtually complete everywhere. “We the People” are helpless bystanders. Few elites get away with mayhem of institutions, society and nation. Also, there is general consensus among experts that demonetization is a short term problem but a long term growth engine. However, to take it forward, contract enforcement and judicial processes will have to play active role. It is impossible to have a big change without some inconvenience and some temporary disruptions.
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