Did the much-awaited board meeting of the Reserve Bank of India on Monday end with a truce, a stalemate, or a defeat for the central bank? Almost no one thinks the RBI managed to get its way entirely, but indications at least suggest that the central bank has staved off some immediate challenges to its autonomy from a government that was threatening to use the nuclear option. The announcement of a committee to look at the question of the RBI’s surplus reserves, which the government was hoping to dip into, and a review of the Prompt Corrective Action framework, which is aimed at cleaning up banks with junk assets, means some of the key battles have only been postponed.
The RBI board took nearly nine hours to come to various decisions, even though the final statement was short and did not carry any indication of how fractious such a long session was bound to have been. And in the aftermath, the government seemed to want credit for avoiding the worst possible outcome: RBI Governor Urjit Patel resigning because of the Centre’s interference, a move that would have sent terrible signals to the markets and investors.
One could look at the events of the last month as the actions of a desperate government, which has failed to pull in a windfall of revenues through either demonetisation or the Goods and Services Tax. What stable government with smart policymakers would allow the relationship with its central bank to become so fraught? But there is another way of looking at what happened here.
If there is one thing the Bharatiya Janata Party has done successfully over the last few years, it is to shift the middle ground significantly to the right. This is how what was formerly considered fringe has become mainstream, even as a more virulent fringe makes itself apparent. One can examine the approach to the RBI from the same point of view: It is only natural that the central bank, being a product of inherited policies and the bureaucracy, would be resistant to major change and giving away some of its autonomy.
So the government engaged in a private and public effort to demand more control, ensured that the bank was aware that it could use the “nuclear option” – the never-before-deployed section 7 – and trotted out Rashtriya Swayamsevak Sangh ideologue S Gurumurthy to make incredulous arguments, like saying the government should have the power to print money. Ultimately the government did not use section 7, has not caused RBI Governor Patel to resign and has not, of course, asked that it be allowed to print money.
But the “middle ground” has indeed been that the RBI gives up some of its autonomy, allowing committees to examine issues that it was otherwise certain about, while some other issues have been left open to further interference in the future. The RBI tried to use the same tactic, with a speech promising the “wrath of the markets” and “economic fire” in case the government stepped on its toes, but the capacity of bureaucrats to use this approach is much more limited.
On paper all of this might seem fine. Indeed, the RBI is answerable to the government and should occasionally be pushed to re-examine its resistance to change. But the BJP’s sledgehammer approach to shifting the middle ground risks undermining the stability of institutions that India has spent decades building. The RBI is the most obvious example, but these efforts are taking place across government and collectively they threaten the very stability of the country. Bureaucrats trying to push back will be hampered by the fact that they are government servants. Can the Opposition, and civil society, muster enough attention and sustained action to resist further undermining of the institutions that keep this country stable?