With apologies to readers of this esteemed newspaper, I propose to begin today’s column on a personal note. I have had the privilege of being associated with both the Ministry of Finance (MoF) as well as the Reserve Bank of India (RBI) for over two decades in different capacities. Having worked with several finance ministers on preparation of budgets, banking, and other macro-economic issues, I genuinely believe that India is fortunate in having Mr Pranab Mukherjee at the helm of the finance ministry at a time when the global financial system is facing one of its worst crises. Without doubt, he is one of the most knowledgeable and experienced political leaders, not only in India but also globally.
Against this background, the present “spat” — and there is no other word for it — between the MoF and the RBI has come as a big surprise to me. The reason for surprise is not because there is a difference of views between the MoF and the RBI. In an authoritative article, Sanjaya Baru has rightly reminded us that there is nothing new about the MoF and the RBI differing with each other on an important monetary or financial policy issue (Business Standard, July 26). Such differences have occurred several times in the past, particularly in the 70s and the early 80s when the government had a dominant role in allocating credit, supervising banks and managing foreign exchange.
What is, however, surprising about the present case is the nature of the proposal mooted by the MoF, and the role charted for the new Financial Stability and Development Council (FSDC). I know of no other major parliamentary democracy with separation of powers among decision-making authorities on fiscal and monetary issues, where there is a formal committee of this type with the finance minister as chairman and the central bank governor as vice-chairman. This is an important institutional change in the regulatory structure of the financial system with long-term implications.
The government is, of course, the supreme executive authority which is accountable to the people through their representatives in Parliament. The government is free to redefine, through appropriate legislative measures, the role of a particular regulatory authority, or create or abolish one. It is also an established practice for the government and regulatory institutions, including central banks, to have consultations on matters of public importance. At highest levels, however, such consultations generally take place on a bilateral and confidential basis, and not in a formal standing committee of government chaired by the finance minister with the governor of the central bank as deputy chairman.
In justification of the decision to set up the FSDC, as reported in the press, the finance minister has observed that if something goes wrong, the ultimate responsibility lies with him and that “the buck stops here”. In theory, this position is correct and applies to all ministries — the minister concerned is constitutionally responsible to Parliament. In reality, however, the position is very different.
Thus, consider the ongoing mess in organising the Commonwealth Games, where India’s reputation is at stake. Has any minister accepted his/her responsibility and accountability to Parliament? What about rotting foodgrain in a country with highest number of people with malnutrition? The Centre has passed the “buck” to the states, which, in turn, have blamed the Centre! How about illegal mining by ministers? How about the country losing more than Rs 50,000 crore because of delays in implementing public projects launched by — and inaugurated by — ministers? And then, there is the huge scandal over allocating 2G spectrum by the telecom ministry.
The point is simply that while in theory the “buck” stops at the ministerial level, in reality if something goes wrong, it is passed on to someone else.
Take disputes between two or more regulatory authorities on jurisdiction, for example, the one between the Insurance Regulatory and Development Authority and the Securities and Exchange Board of India recently. The MoF had to resolve this dispute by passing an Ordinance. The finance minister’s disgust with this development is understandable, and so is his frustration which led him to comment in the House: “What do you expect me to do? Will I remain a mute spectator, if regulators quarrel like petulant children?”
The question, however, is: Whose “petulant children” are they? It is the same ministry that had drafted legislation to set up these regulatory agencies and define their respective jurisdictions (which had to be recently clarified by another Act of Parliament). The government is also the appointing authority for top management of public sector agencies, including regulators. This, of course, is no excuse for this unfortunate episode developing as it did. But then, there is no guarantee that the creation of another super-agency will prevent such disputes from arising in future. Or that, if such a dispute arises — which fortunately is likely to be rare — it cannot be resolved on a case-by-case basis without a permanent committee under the MoF.
The potential danger in setting up a committee of this type is that it confers powers on the government to formally intervene in financial regulatory issues, including monetary policy, if it so decides some time in the future. There is no such danger at present under a sagacious and respected finance minister. But, who knows, what could happen in the long run. The same FSDC will be there, but we may have a different finance minister with a different agenda. Sometimes, even well-meaning policy or institutional initiatives may have adverse “unintended consequences”. I earnestly hope that the government will drop the idea of setting up the FSDC, if necessary through a legislative amendment.
Bimal Jalan is former RBI governor and author of The Future of India — Politics, Economics and Governance
