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Disagreements between the government and the central bank are a common occurrence in any economy. It is an expected outcome, given their contrasting roles where one has to maintain the growth of the economy at a healthy pace while the other has to ensure price stability, which sometimes dampens growth prospects. However, this time it was different as weeks of animosity between North Block and Mint Street has culminated in the resignation of the RBI Governor, Urjit Patel.


To underscore the gravity of the situation, it should be pointed out that it is only the second instance in the history of independent India that an RBI governor had to resign. The previous case goes back to 1957 when the RBI Governor, Sir Benegal Rama Rau, resigned due to differences with the then Finance Minister, T.T. Krishnamachari (TTK). Rau had disliked the fact that TTK believed and publicly claimed that the RBI was a subordinate office of the Finance Ministry and treated it as such. He even openly hijacked the RBI’s monetary policy by announcing a stamp duty on bills. To Rau’s dismay, even Prime Minister Jawaharlal Nehru sided with his Finance Minister.

The case of Urjit Patel somewhat closely resembles that of Rau in the sense that his disagreements with the government also seemingly arose from its intrusion into the RBI’s working. Over the last few weeks, it had become evident that there were at least three things that the government wants the RBI to do differently.

The first issue arose after the collapse of IL&FS, which sparked fears that banks might become wary of lending to non-banking financial companies (NBFCs) leading to a liquidity squeeze within the sector that might put India’s credit market at risk. Most significantly, the MSME sector was feared to take the worst hit, which would have brought the economy to a standstill. In order to avoid such an outcome, the government wanted the RBI to open a special liquidity window for the NBFC sector and avoid the risk of a credit freeze. In turn, the RBI was of the view that a liquidity window should be the measure of last resort. The situation was not as exigent in its view.

The second contentious issue was the RBI’s handling of the bad loan issue. In response to the NPA crisis, the RBI put 12 banks – 11 in the public sector and one in the private sector – under its Prompt Corrective Action (PCA) framework under which these institutions face lending restrictions until their proportion of bad loans are substantially reduced. Since this regulation has dampened lending activity in the economy, the government has been pushing the RBI to ease its implementation, which the central bank has firmly resisted.

The third point of contention was the central bank’s reserves. The government breached its full-year fiscal deficit target at the end of October, which was meant to happen by the end of March 2019. Nevertheless, the government has still maintained its commitment to not breach the fiscal deficit target of 3.3 per cent this year. So, it is looking for avenues to gain additional revenues. The RBI, which has way more than the required reserves at over 26 per cent of the total assets compared with a global mean of 16 per cent, seems like a viable source to tap into. But the RBI has maintained that it needs a strong balance sheet to function effectively.

The long-simmering tussle over these issues was even punctuated by finance ministry signalling the invocation of the never-used Section 7 of the RBI Act, which allows the government to give directions to the RBI that it may “consider necessary in the public interest.” As far as public knowledge goes, the Section has not yet been invoked. 

It is not yet clear what specifically led to Patel’s resignation, but a combination of these factors surely has had a role to play. A former RBI governor painted the move as “a statement of protest”.

When the BJP government had come into power, it had established a lot of goodwill by infusing independence in the RBI’s functioning. The establishment of the monetary policy committee that was tasked with inflation targeting was the perfect model that ensured the operational independence of the central bank to attain its objectives. The mechanism gave India a state-of-the-art monetary policy framework that was sorely missing in the economy. It was one of the most important economic reforms of the BJP government that is now at risk of being dismantled. 

Patel’s resignation, irrespective of the reasons that caused it, puts a significant dent on the public trust in the autonomy of the functioning of the central bank; something which this government itself has tried hard to build.

Trust is a currency that holds the entire modern economic system together and significantly reduces transaction costs. It will be extremely costly for the economy in the long-run if that trust is weakened in any sense. So, the government should be wary of taking any actions that affect the public trust in the country’s institutions as short-terms gains of kickstarting lending activities or meeting the fiscal deficit targets cannot compensate for the repercussions that will emerge from the means adopted in achieving them. 

The way forward for the government should be to adopt a more collaborative approach with the RBI, instead of a combative one, to achieve the intended economic goals.

IANS

 Former Economic Affairs Secretary Shaktikanta Das on Wednesday assumed charge as RBI Governor after Urjit Patel abruptly resigned from the post amidst a tiff with the government on the central bank’s autonomy.

“Assumed charge as Governor, Reserve Bank of India. Thank you each and everyone for your good wishes,” the new incumbent said in a Tweet.

Das, who as Economic Affairs Secretary steered the monetary situation post-demonetisation, was appointed the Reserve Bank of India (RBI) Governor on Tuesday.

His appointment came at a time when the government and the RBI are engaged in a tussle over several issues including transfer of the central bank’s reserves, over which Patel had reservations after the government hinted at forcing him using provisions of the RBI Act.

Das, a retired 1980-batch IAS officer from the Tamil Nadu cadre, was a member of the 15th Finance Commission of India and India’s Sherpa to G20. Having a master’s degree from St. Stephen’s College, he earlier served as Joint Secretary in the Expenditure Department of the Finance Ministry.

In a development that came as an embarrassment for the government, Patel resigned on Monday citing “personal reasons” even as his various predecessors hinted that the decision was rooted in the recent controversy involving the government and the central bank.

His resignation came against the backdrop of the tiff between the government and the central bank over the liquidity and credit crunch in the economy that provoked an extraordinary meeting of the RBI board on November 19. 

IANS

 Indian stock indices bounced back into the green as election trends on Tuesday noon showed the Bharatiya Janata Party (BJP) took a narrow lead in the Madhya Pradesh Assembly elections after trailing to the Congress earlier.

The S&P BSE Sensex, which had fallen over 500 points during the morning session, traded at 34,988.62 points around noon, higher by 28.29 points or 0.08 per cent from the previous close.

The Nifty50 on the National Stock Exchange traded at 10,503.30 points, higher by 14.85 points or 0.14 per cent from the previous close.

According to analysts, market indices pared losses due to short covering and buying at lower levels.

“Markets would swing till around noon based on leads positions in Madhya Pradesh as the other four states are showing clear winners,” HDFC Securities’ Retail Research Head Deepak Jasani told IANS.

On the currency front, the Indian rupee weakened to 72 against the US dollar from its previous close of 71.34.

“Election results are not going the BJP way. But the rupee has recovered from the opening losses as central bank intervention may be occurring,” said Anindya Banerjee, Deputy Vice President for Currency and Interest Rates with Kotak Securities.

“We could see more volatility and USDINR can trade within a wide range of 71.70 and 72.50 on spot.”

IANS

A Bengaluru firm has developed a vehicle that can be used to carry out rescue operations in water, such as take the first rope across a stream during floods. Two such units have already been purchased by the State Disaster Response Force (SDRF).The vehicle, termed unmanned multi-purpose craft, has been developed by AlphaMERS Ltd, a firm engaged in providing solutions in disaster response.

The craft costs just under `1 lakh and, looks like a small aircraft and is double the size of a drone. It can move on water, and is propelled by an electric motor, which is powered by a battery. Currently, the craft is manoevered manually by a person on land via two ropes attached to the craft. The material used is aluminium, making the device very light.

Executive Director of AlphaMERS D Chandrasekhar, said the device can be used to rescue people before they drown. “We are working on building a separate device, similar to a lifebuoy, to be attached in front of the craft. So a drowning person can grab it and be pulled ashore by the rope attached to the craft,” Chandrasekhar said.

Reserve Bank of India Governor steps down citing ‘personal reasons’ after fight over autonomy of the central bank.

 Showing an increase of 15.7 per cent over the last year, the gross direct tax collections till November stood at Rs 6.75 lakh crore, according to provisional figures released on Monday.

This was despite a 50 per cent rise in filing of income-tax returns over the last year.

The government said the collections in the corresponding period of the last fiscal included collections under the Income Declaration Scheme amounting to Rs 10,833 crore, which do not form part of the current year’s collections.

Of the total tax collected, refunds amounting to Rs 1.23 lakh crore have been issued during April-November, which is 20.8 per cent higher than refunds issued during the same period in the preceding year, the Finance Ministry said in an official statement.

“Net collections (after adjusting for refunds) have increased by 14.7 per cent to Rs 5.51 lakh crore during April-November. The net direct tax collections represent 48 per cent of the total Budget Estimates (Rs 11.5 lakh crore) of direct taxes for FY19,” the statement said.

It said while the Corporate Income Tax was growing at 17.7 per cent, Personal Income Tax collections were growing at 16 per cent.

Last week, the Central Board of Direct Taxes (CBDT) Chairman Sushil Chandra had said that over six crore income-tax returns had already been filed this year for the assessment year 2018-19, showing an increase of 50 per cent over the last year.

He also expressed confidence that the government would meet the Rs 11.5 lakh crore direct tax collection target.

 Negative global markets, along with caution ahead of the results of assembly elections in five states and a rise in crude oil prices, suppressed the key Indian equities indices during Monday morning’s trade session.

The key indices — the S&P BSE Sensex and NSE Nifty50 – had a gap-down opening and subsequently shed over 600 points and 190 points or more than 1.60 per cent each.

According to market observers, heavy selling pressure in banking, consumer goods, oil and gas, capital goods and automobile stocks, along with continuous outflow of foreign funds accelerated the downward trajectory of the equity indices.

On the currency front, the Indian rupee weakened to 71.39 against the US dollar from its previous close of 70.81.

At around 10.50 a.m., the wider Nifty50 of the National Stock Exchange (NSE) traded lower by 186.15 points or 1.74 per cent to 10,507.55 points.

The barometer 30-scrip Sensitive Index (Sensex), which opened at 35,204.66 points, traded at 35,066.82 points — lower by 606.43 points or 1.70 per cent — from its previous session’s close of 35,673.25 points.

The BSE market breadth was bearish with 1,638 declines and only 384 advances.

“Indian markets have expectedly opened lower and are currently trading about 1.7 per cent lower,” HDFC Securities’ Retail Research Head Deepak Jasani told media.

“Despite the negative of exit polls (that impacts only India), our markets have fallen in line with the other global markets which were down due to resurgence of US-China friction and rise in crude prices.

“Actual election results will be known on Tuesday and if BJP does well compared to the expectations in exit polls then we could witness a minor relief rally. However the overhang of negativity may still persist.”

On Tuesday, the results of the state Assembly elections in Rajasthan, Madhya Pradesh, Chattishgarh, Telangana and Mizoram will be declared. These elections are considered as a crucial indicator of public mood before the Lok Sabha elections which are due in April-May 2019.

Besides the outcome of the state elections, a rise in crude oil prices after the Organisation of Petroleum Exporting Countries (OPEC) and Russia decided to go in for a production cut of 1.2 million barrels per day from 2019 might hinder the markets’ attempts to arrest the fall.

Last Friday – the previous trade session – bargain hunting and lower crude oil prices lifted the key Indian equity market indices by around 1 per cent.

Consequently, the NSE Nifty50 had ended higher by 93 points or 0.87 per cent at 10,693.70 points, whereas the Sensex closed at 35,673.25 points, up 361.12 points or 1.02 per cent.

IANS

 The government on Friday appointed Hyderabad-based Indian School of Business (ISB) Associate Professor Krishnamurthy Subramanian as the Chief Economic Adviser (CEA) in the Finance Ministry for a period of three years.

Subramanian fills the position lying vacant for about six months since Arvind Subramanian left in June.

The Appointments Committee of the Cabinet approved the appointment of Krishnamurthy Subramanian, Executive Director (Centre For Analytical Finance), ISB, to the post of CEA, the Department of Personnel and Training said.

A PhD (Financial Economics) from the Booth School of Business, University of Chicago, and an alumnus of IIM Calcutta and IIT Kanpur, Subramanian is an expert in banking, corporate governance and economic policy.

His services on the expert committees on corporate governance for Securities and Exchange Board of India and on governance of banks for the Reserve Bank of India have established him as one of the chief architects of corporate governance and banking reforms in India, the ISB website says.

IANS