Jaitley has restored the equilibrium between the government and RBI

Jaitley has shown the necessary determination and ability to reduce fiscal deficit from minus 4.48% in 2013 to minus 3.53% in 2017. He said, publicly, on 24 November, “We don’t need any extra funds from any other institution to finance our fiscal deficit...I don’t need it.” But economic growth, he added, must not be stalled by restricting credit and liquidity.

analysis Updated: Nov 29, 2018 16:25 IST
Reserve Bank of India
Finance Minister Arun Jaitley (L) and RBI governor Urjit Patel at 569th central board meeting, New Delhi, February 10(Mohd Zakir/HT PHOTO)

Success, as the saying goes, has a thousand fathers and failure languishes as an orphan. But in contemporary media it is the problem which feeds frenetic headlines while the solution, or resolution, merely gets a passing nod before the collective rush to the next tangle.

The deft, cool and coordinated manner in which finance minister Arun Jaitley finessed and then defused what could have blown up into the crisis of this winter, with debris flying into the next general election, has thereby received less credit than it merited.

The omens were not happy. When Viral Acharya, deputy governor of the Reserve Bank of India, lit a fuse by describing any potential dilution of RBI’s “independence” as “potentially catastrophic” the stage seemed set for an extended confrontation between RBI and government over enhanced liquidity for the small and medium sector, a key focus point of Prime Minister Narendra Modi’s vision for higher economic growth.

RBI seemed to prefer a more conservative view of its autonomy and mandate, arguing that “price stability” was its primary concern and that fiscal prudence required a leash on its massive reserves, currently circa Rs 9.59 lakh crore. RBI’s role in curbing inflation is well known, not least because it reminds us of it so often. But its mandate is more than that: “to maintain price stability while keeping in mind the objective of growth”.

Ideally one should not be at the cost of the other. And this is where the Modi government’s track record, managed by its finance minister, became a persuasive part of the administration argument. By 2013 inflation had spiralled to 10.92%. This was whittled to 6.37% in 2014, 5.88% in 2015, and 4.97% in 2017. In other words, inflation control has been one of the great success stories of this administration. A careful government rather than a profligate one was asking for greater liquidity. To imply that the prime minister or the finance minister would damage such hard-won credibility on the eve of an election is a trifle absurd.

Similarly, Jaitley has shown the necessary determination and ability to reduce fiscal deficit from minus 4.48% in 2013 to minus 3.53% in 2017. He said, publicly, on November 24 , “We don’t need any extra funds from any other institution to finance our fiscal deficit...I don’t need it.” But economic growth, he added, must not be stalled by restricting credit and liquidity.

Public life is what it says on the tin: public. Jaitley knew that it was not enough to win his case in the framework of power. He also had to win the argument in the roofless arena of political debate. The Congress, which seems to be in autocue mood, reacting first and thinking later, decided to become a champion of RBI “independence”.

One serious problem that has arisen has been propelled by what should be called a slow transference of meaning. RBI does have autonomy in fiscal measures, which is an effective and valuable protection. But autonomy is not independence, as is being drummed up repeatedly by votaries and partisans. RBI is a regulatory body which functions as one of the parts of government. Its directives cannot contradict government policy.

In 1957, the RBI governor, Sir Benegal Rama Rau, challenged finance minister TT Krishnamachari on a similar issue of lending. Prime Minister Jawaharlal Nehru intervened. Nehru wrote to Rau, “Certainly, it [RBI] is autonomous, but it is also subject to the central government’s directions. Monetary policies must necessarily depend upon the larger policies which a government pursues.” Nehru mentioned that it would be “completely absurd” if RBI opted for a policy different from government as it was only one part of “various activities” in governance.

The moment Nehru entered the picture, Congress went out of the door. You may have heard the silence.

There cannot be two finance ministers. Sir Benegal resigned. The tenure of at least two other RBI governors was curtailed on a nod from Delhi. The reasons were different. Nor is it anyone’s case that this practice should either be followed or encouraged. But in all cases government established its primacy in the exercise of policy. Finance Minister Arun Jaitley has successfully protected Prime Minister Modi’s growth policy, defended the principle of authority, defused a ticking bomb and restored the equilibrium that must rule relations between the Union government and the central bank of the country.

MJ Akbar is a BJP MP and former minister of state for external affairs

The views expressed are personal

First Published: Nov 28, 2018 18:07 IST