The Reserve Bank of India's board meeting on Monday was unusually nerve-wracking. It lasted the entire day, finishing after 7 in the evening, and produced little more than a few lines from the RBI on its website. We don't know what happened inside that room - but in spite of claims that it was calm and conciliatory, there's little doubt that the deep divisions between Mumbai's bankers and Delhi's Finance Ministry have not healed.
What was going on, precisely? Why has the RBI become the next front-line of the Modi government's war on institutions?
Two things have caused the government to go on the warpath. The first is its own failure to create jobs; the second is the poor quality of the Goods and Services Tax (GST) it eventually delivered.
Why do jobs matter? Because, of course, an election is on its way and some voters might remember that Narendra Modi promised, as a candidate in 2014, to create 10 million jobs. He's failed to create those jobs - do you hear the government tom-tomming the success of 'Make in India'? You don't, because it hasn't worked. But worse, demonetisation and the botched GST rollout may have actually caused millions to lose the jobs that they had. So how has the Bharatiya Janata Party changed its tune? It's instead decided to focus on small entrepreneurs - what Modi's critics derisively call "pakoda-nomics" after the Prime Minister insisted that pakoda stalls were his notion of job creation. Yet, even that model lies in tatters. Because it depended upon the expansion of credit to micro, small and medium enterprises. But the public sector banks that could have done so are being sanctioned for their awful past decisions - and all the bad loans they took on - by the RBI. The government, therefore, is panicked that in the absence of credit, even its Jobs Plan B might not be workable. It clearly has no Plan C. Its solution? To pressure the RBI into reducing its efforts to hold banks accountable. Let the banks under the RBI's "prompt corrective action" scheme - which are supposed to focus on cleaning up their balance sheets, not on building them up- start lending again. The RBI recognises this would be a disaster; the government doesn't care. Hence, the first conflict.
Next, there's the question of government revenue. The GST, properly designed and implemented, was supposed to lead to a double-digit increase in indirect taxes, giving the government a nice cushion to spend ahead of elections. But the government's own data till September suggested that the centre's take of indirect tax collection so far in 2018-19 has grown by less than two per cent - compared to, say, the 20 per cent growth in 2015-16. Although other forms of revenue have partially compensated for this, the government faces a hard choice between its budget promises and its own electoral requirements. We don't know how much the new healthcare scheme will cost; and it is common knowledge that the Prime Minister would like to be able to hand out quite a bit of money in the last months before the election just in case voters are a little disgruntled that he has failed to fulfill most of his big 2014 promises. But where's the cash? As far as the government is concerned, it's all with the RBI. And so the same economics geniuses who gave you demonetisation have concocted a plan to drain the RBI of the reserves it keeps on hand to deal with, say, a banking crisis. The RBI, for some reason, disagrees that its crisis-fighting resources should go instead towards Modi's re-election. Hence, conflict number two.
The truth is that, even if this particular board meeting ended with no particular resolution, this is a fight that the RBI cannot win if the government keeps pushing. The government has already threatened to use Section 7 of the RBI Act which empowers it to "direct" the RBI. This section is never used - but does that matter to the government? After all, Modi will be the first to tell you he is the first strong Prime Minister in India's history, and unlike all the weak Congressmen (and third-fronters, and Vajpayee) who came before him, he is perfectly willing to break new ground to have his way. Who knows, the BJP's WhatsApp army and tame news outlets might even turn this undermining of the institutional structure of India into another victory, the way that they tried to turn a civil war within the CBI into a win for Modi.
And, of course, even if Section 7 does not get used, in the end it is the government that appoints the Governor of the RBI. Urjit Patel's term ends next year. He was supposed to be a rubber-stamp for Delhi, but the fact that he is not a supine and house-trained bureaucrat means he instead has fought for RBI independence. He is, after all, only in his early 50s, and would expect a long and distinguished career to follow his stint as Governor - a career that would not be enhanced by being the Governor who gave up his institution's independence.
If Modi is re-elected in 2019, and if he still wants his way, all he has to do is appoint one of his favourite bureaucrats Governor. Who can stand in his way then?
(Mihir Swarup Sharma is a fellow at the Observer Research Foundation.)
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