Paper Brief Details

GS 2: Polity & IR : 19/11/18

  • 19/11/2018

Any attempt by the Centre to override the RBI Governor using the RBI Act would be ill-advised

  • The role of the Board of Directors of the Reserve Bank of India (RBI) and its powers vis-à-vis the RBI Governor have come into focus in the ongoing tussle between the Centre and the central bank. The Centre has hinted that it is examining the option of using the powers of the RBI Board to override the Governor.
  • There are several questions that arise from this unprecedented attempt by the Centre to use powers under the Reserve Bank of India Act, 1934.
  • The most important of these is: Where does the balance of power lie between the Governor and the board? What is the legal position of the board in relation to the Governor? Does the latter draw his powers from the board as in a corporate set-up? Can the board give directions to the Governor on issues of policy and management of the central bank?
  • The relationship between the board and the Governor is not comparable to a corporate set-up where the managing director (the corporate equivalent of the Governor) reports to the board and draws his powers from it.
  • While a managing director is an agent of the board in a company, in the RBI, the Governor is not.
  • He draws his powers from the RBI Act and not from the Board of Directors.
  • He is appointed by the Prime Minister in consultation with the Finance Minister.The RBI Board has no say whatsoever in his appointment.
  • In a company, the board of directors chooses one of its own to be appointed as the managing director.
  • In the RBI, the Governor secures board membership only after he is appointed to the post. It is, thus, wrong to compare a corporate board to the RBI’s and suggest that the Governor is subservient to it.
  • Constitution of the board
  • But what is the constitution of the RBI board like?
  • As per the RBI Act, the board is made up of the following members: the Governor and four Deputy Governors, four directors (one each from the four regional boards of the RBI), 10 directors to be nominated by the Centre, and one government official who is also to be nominated by the Centre.
  • The present board is made up of 18 members, which is the Governor and four Deputy Governors, four regional board members and nine nominees from the Centre who include two officials, the Economic Affairs Secretary and the Secretary, Department of Financial Services.
  • The sections in the RBI Act dealing with this subject are rather vaguely worded. Eminent past Governors have interpreted Section 7, the relevant one, to mean that the powers of the board and that of the Governor are concurrent.
  • The Governor draws his powers from Section 7(3) of the Act. He can exercise all powers and do all things that may be exercised and done by the RBI.
  • The board, under Section 58, can make regulations that will give it the powers to override those of the Governor’s. But this is subject to two important conditions.
  • First, the regulations have to be consistent with the provisions of the RBI Act, which essentially means that the board has to act within the framework of the Act.
  • Second, these regulations have to go through an elaborate approval process before they become law (Section 58(4)).
  • The board has to forward the regulations to the Centre, which will have to table them in both Houses of Parliament. Members have a period of 30 days within which they can either suggest modifications to the regulations or annul them.
  • And then, there is the brahmastra of Section 7(1) which confers powers on the Centre to issue directions to the RBI “from time to time” in the public interest after consultations with the Governor.
  • All bets will be off if this section is invoked as it will become untenable for the Governor to continue in his position.
  • The RBI Board has always functioned in an advisory role with the understanding that the Governor would consider its advice while making policy decisions.
  • In other words, there was mutual respect between the board and the Governor, with both operating in a spirit of accommodation.
  • The fact is that neither Section 7(1) nor Section 7(3) has been unleashed in the 83-year existence of the RBI. Not even when the RBI was privately owned between 1935 and 1949.
  • It is not as if there have not been any disagreements between RBI Governors and governments before this
  • Former Governor, C. Rangarajan, has spoken about how the RBI, under Governor R.N. Malhotra, was forced by the Centre to withdraw a circular freeing short-term rates of banks. Yet, there was no chatter of invocation of Section 7 or of the board arming itself with governance powers.
  • What’s the difference between then and now?
  • The short answer is that the spirit of accommodation, which flows out of mutual respect and understanding of each other’s compulsions between the RBI and the Centre, and which was evident then, is absent now. And the blame for this has to be shared by the players involved in the current tussle.
  • It may not be very difficult for the Centre to have its way by using the board’s powers to frame regulations overriding the Governor but this will necessarily come with a price. Such a move will not only set a bad precedent but also lead to several ticklish situations.
  • The RBI Board has several representatives from industry. The present board includes N. Chandrasekaran, Chairman of Tata Sons, Dilip Shanghvi, MD of Sun Pharma, and Manish Sabharwal, founder of Teamlease.
  • There will be a conflict of interest if industrialists are members of committees that run the affairs of the monetary authority of the country (and we are not for a moment suggesting that they will behave in any manner favourable to their interests).
  • Second, there is a good reason why the RBI has been kept at arm’s length from the Centre and bestowed with a certain independence. That is because the Centre is the spender and the RBI is the creator of money, and there has to be a natural separation between the two. The Centre arming itself with powers to run the RBI runs afoul of this precept.

Section 7 of RBI

  • Though the government had ‘referred’ Section 7 of the RBI Act for ‘consultation’ on these issues, it may refrain from issuing directions as such a move will have wide ramifications.
  • Section 7 has never been used in the 83-year history of the bank. Invoking it would be interpreted as interference in the bank’s autonomy.
  • It would also have a bearing on international agencies such as the International Monetary Fund that issue ratings for central banks. These agencies have been raising the issue of Section 7 for sometime now, saying ‘if such a provision exists, how can the RBI be independent?’ However, the RBI has been telling them that though that provision exists, it has never been used.
  • To meet the government halfway, the RBI may take some steps to boost loans to the MSME sector that had been badly hit by the demonetisation exercise, and which the government is keen to support in an election year.
  • However, it is to be seen how much RBI can do, since the central bank may have some reservations about the sector’s loan absorption capacity at this point in time.
  • The RBI may also climb down from its position of stringent norms for the PCA framework for banks. As many as 11 public sector banks out of 21 are under PCA, which the government thinks is hampering loan growth. RBI may ease some of the conditions, which may help some lenders come out of PCA.
  • The RBI and the Centre may also reach an agreement to form two committees, to address the issue of economic capital of the RBI and other governance issues.
  • The issue of economic capital is a technical one and conclusion on such an issue cannot be reached in a two-hour board meeting.
  • On the governance issue, it is increasingly felt that the RBI management must be made accountable to the board. The board so far has refrained from taking up specific policy-related issues and its main focus has been to provide a broader vision to the central bank.
  • It has been argued that the central bank has slipped on many issues — such as not anticipating the IL&FS crisis and poor supervision in the case of fraud perpetrated at the Punjab National Bank — and that its management should have been made accountable to the board.

Quota for Marathas approved

·        Socially and Educationally Backward Class category created for the purpose

  • The Maharashtra Cabinet cleared the decision to extend reservation to the Maratha community by creating a new category called Socially and Educationally Backward Class (SEBC) on the recommendations of the State Backward Class Commission.
  • The reservation quantum will be fixed by the Cabinet sub-committee assigned to chalk out the technical aspects of the law that will be presented in the next two weeks.
  • The recommendations are Marathas are socially and educationally backward class of citizens with miniscule representation in the government and semi-government services; socially and educationally backward class can be extended benefits of reservation under Articles 15(4) and 16(4) of the Constitution and in view of such extraordinary and exceptional condition, the State government is liable to take action.
  • The proposed reservation for Marathas will cross the 50% mark set by the Supreme Court, the BC Commission had specifically mentioned that the condition of Marathas was extraordinary and exceptional.
  • Following the pattern of Tamil Nadu crossing 50% reservation is pending in the Supreme Court, it has not been struck down either. We are confident of extending reservation to Marathas.
  • No need permission from the Centre.
  • The report did not recommend including or merging Maratha reservation with that of the OBCs.
  • The Dhangars are presently under the VJNT category with 3.5% reservation. Their demand is that they should be added in the Scheduled Tribe category, which comes under the Centre’s purview.

In case of a split vote, Governor holds the aces

  • The public exchange of words and criticism began with RBI Deputy Governor Viral Acharya firing the first salvo, saying the government was encroaching on the central bank’s independence and autonomy.
  • Opinions on the matter ranged from saying that the government had no business to engage in monetary policy decisions to opining that the RBI was never really independent of the government due to the way the RBI Act is worded, and still others pointing out that the whole issue was not a tussle between institutions but between two particular individuals.
  • The issue of the government encroaching on the RBI’s autonomy has been discussed extensively already, but less has been mentioned about the effects that differences between the RBI Governor and the Centre could have on decision-making, as seems to be the case currently.
  • One of the main issues with bodies like the RBI Board and the Monetary Policy Committee is whether decision making by committee is preferable to one man calling the shots.
  • The government prefers decisions by committee, as can also be seen by how it pushed to install a Monetary Policy Committee to replace the Governor as the sole arbiter of monetary policy decisions.
  • But someone in the government at the time of framing the RBI Act clearly seems to have also studied the research on voting systems and committees, and how they can be manipulated.
  • Section 13 of the RBI Act says: “The Governor, or if for any reason, he is unable to attend, the Deputy Governor authorized by the Governor under the proviso to subsection (3) of section 8 to vote for him, shall preside at meetings of the Central Board, and, in the event of an equality of votes, shall have a second or casting vote.”
  • In other words, the Governor is the tie-breaker in all decisions of the Board. In doing so, they risk giving a potentially discontented Governor the deciding vote.

India steps up agro-diplomacy with China

  • As the trade war with the United States continues to bite — with only a slim chance that the world’s two biggest economies can go past a possible truce — China appears to be opening up to non-U.S. imports.
  • Sensing that China would look first at its food security by diversifying imports in view of the trade war, New Delhi has stepped up its agro-diplomacy with Beijing.
  • Though Indian soya bean exports are apparently a priority, especially after the China imposed a 25% levy on U.S. imports, success in the huge Chinese soya bean market is yet to materialise, though some progress may have registered during talks.
  • China has also opened up imports of non-Basmati rice from India in June on the sidelines of the Qingdao summit of the Shanghai Cooperation Organisation (SCO).
  • China is a lucrative $1.5-$2 billion market for Indian rice.
  • Despite signs of incremental progress, India’s $63-billion trade imbalance with China is alarming.