18 angry men and two staid questions

“It seldom pays to be rude”. But more importantly, noted Norman Douglas, a British diplomat and author of Siren Land, “It never pays to be only half-rude”. India’s central government might have committed this grievous error earlier this week. 

For a few weeks now, the Union government has been threatening to overrule India’s central bank. It initiated discussions under the dreaded Section 7 of the Reserve Bank of India Act; this provision has never been used, and it allows the government to make the RBI management (that is, the RBI governor and his team of deputy governors) to fall in line. Indeed, reports suggested that in the last week or so before the crucial meeting of the RBI’s Central Board on November 19, there were efforts from the government’s side — and that’s crucial to note — to ensure that the situation doesn’t blow up completely. That’s because one of the deputy governors of the RBI, Viral Acharya, had delivered one of the most uncharacteristic speeches one could imagine from a deputy governor. On October 26, just days after the previous board meeting that incidentally ended inconclusively, Mr Acharya gave a long acerbic lecture — obviously targeting the central government — stating that “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution…”. 

No one knows what happened to the cats and the pigeons but this speech surely made it clear to anyone who cared to bother that the RBI top management might favour resigning instead of signing on the proverbial dotted lines. Given the tense political climate — five states are in the process of holding Assembly polls — and the worsening macroeconomic climate —  the government could simply not afford the resignation of the RBI governor.

In the end, that Mr Patel (and possibly others such as Mr Acharya) did not resign anytime during the day on November 19 appears to be the real achievement of the government. After all, with apologies to Oscar Wilde, losing one RBI governor may be regarded as a misfortune; losing two would have looked like carelessness. (Indeed, Raghuram Rajan did complete his 3-year stint but if the reader followed the nature and circumstances in which his tenure ended, one might not quibble over this characterisation.) But short of this achievement, if one can call it, the board meeting reminded this columnist of the movie 12 Angry Men. Hence the title of this piece. In fact, while technically there were 18 in the board meeting, in terms of the ability to vote, there were only 12 — the RBI Governor being afforded only a casting vote. Of the remaining 11, seven were government appointment directors, including S Gurumurthy, who, many believe, was the fountainhead of a new wave of thinking that even favours monetising the deficit. The remaining four were representatives of the local boards. 

The fact that Section 7 had been triggered before the meeting sets the context. It was not just a loaded gun. The fact is the gun was also half-cocked. So, we had a situation where the government-appointed members had the voting majority. We also had the existential threat of the RBI being bullied into submission by the use of Section 7. And then the meeting goes on for nine gruelling hours. And at the end of it all, as against a whole host of demands — ranging from forcing the RBI to transfer upwards of a trillion rupees from its notional reserves to relaxing prudential norms for bank lending to relaxing capital adequacy norms to soft-pedalling the Insolvency and Bankruptcy Code to tackling the crisis in non-banking financial companies (NBFCs) sector to improving governance in the RBI, the list goes on — the most substantive decisions pertained to the formation of two committees. 

That has to be an anti-climax if ever there was one. What is new about a government board meeting and deciding that there will be more committees to look into the matters! 

Anyway, the first one would examine the economic capital framework and the possibility of some sharing of the future RBI reserves with the government. Crucially, the RBI blocked the government on its demand for past reserves. This was reportedly the issue that triggered the use of Section 7. The second big issue referred to a committee the functioning of the Prompt Corrective Action (PCA) framework, which has dramatically restrained the lending operations in 11 public sector banks (PSBs). Here the end result is even worse from the government’s viewpoint because the issue will be examined by the Board for Financial Supervision (BFS) of the RBI itself. In the first committee, at least the government will have a say; no such luck in this one. The truly ironic thing is that PSBs under PCA are actually improving on some key metrics. 

It is an open question what these committees will decide, who would benefit from it and when. For the moment — that is, in the immediate context of this government demanding hundreds of billions of rupees to be neatly transferred in its account or, indeed, banks being yanked out of the PCA straitjacket — the RBI seems to have effectively thwarted the government. Do not forget the half-cocked loaded gun. 

Things were worse, however, on the third issue that was taken up: Capital adequacy norms in banks. The RBI stood its ground on the mandated norms, providing only an extension of the deadline. The only point where the RBI seemed sympathetic was on the debt restructuring of MSMEs but here too, the RBI’s offer appeared far lower than the government’s demand. Some other issues such as helping the NBFCs or governance in the RBI were postponed for the next meeting, which is crucially after the results of the state polls are known. Perhaps, if the ruling party sweeps all polls, the gun might be half-cocked again. 

But for the time being the government must know that it stands exposed for the brazen manner in which it goes about dealing with the RBI. It must also answer two simple questions. One: Is it not the case that its own policy missteps are responsible both for the lack of resources at its disposal as well as the mess in MSMEs? Two, in the context of institutional integrity and clarity of role, if the government dominates banking in the country then should it not distance itself from the regulation of banks? Indeed, if it favours regulation so much, should it not ease up on the banking aspect?