“The RBI independence is critical and crucial. It has to be fiercely guarded. But, that does not mean that in shaping monetary policy, the RBI should not consider the fiscal consequences of monetary policies”—Sumit K Majumdar, Professor of Technology Strategy, University of Texas (Hindu Business Line, 6 November 2012)
The attempt by the finance ministry to act as a super regulator over all regulatory bodies in the financial sector is getting more and more exposed. This will destabilize the equilibrium which was deftly built up by eminent persons who headed the finance ministry and the Reserve Bank of India (RBI) in the formative years of financial regulation in India (there were not many regulators in the financial sector, almost till the reform days) and consciously maintained by their successors till the recent past.
The recent developments have once again brought to fore the need for the effective use of options like mutual discussion, internal acceptance of extant legal position and traditions by the controlling ministry/ministries at the Centre and providing opportunity to the concerned regulatory bodies to be heard before super-imposing or giving loud instructions on what is felt right by the North Block, which is an act of expediency which should be avoided in a mature democratic system of governance. It is not a comfortable sight to see the government and regulators putting forth their arguments before the courts and media even before such consultations. One wishes, such disputes are resolved amicably across the table.
The finance ministry has made it a habit of asserting its “ownership rights” over regulatory bodies more often than necessary. This does not augur well especially in an open market economy where more and more controls give way to effective guidance and self regulation. In such a situation, the balance of convenience is in not disturbing the autonomy of statutory bodies like the RBI. For ensuring autonomy, a couple of other factors that need immediate review are the selection procedure of incumbents of top management positions in regulatory bodies and their remuneration and service conditions. Where these are kept captive by the finance ministry, the possibility of the FMs expecting master-servant equation cannot be ruled out.
In August 2010 in an article “RBI Autonomy is under threat” (Free Press Journal, 16 August 2010) Nantoo Banerjee had observed that “on paper, the Reserve Bank governor enjoys autonomy of a constitutional authority and in practice, he is expected to work like those favoured few”. The reasons for this unenviable position are not far to seek. If autonomy has to be functional, the people in position should feel the freedom first.
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We all talk highly about the virtues of the private sector, but do we really allow the public sector imbibe its good features? This is a rarity. How else can one explain the difference in the selection procedures of successors for Ratan Tata and NR Narayana Murthy and those for finding CEOs and top managers of public sector organizations? It will be next to impossible to attract talent to these government positions, given the meagre remuneration and short and uncertain tenures offered. It is time to revisit HR practices at the highest level factoring in market realities. The present practice has resulted in compromises on quality and the nation can ill-afford this state of affairs.
Since the beginning of the last decade, the finance ministry has been having problems with almost all regulators. It is not the other way round. Because of the RBI’s premier position, the issues in which the central bank is involved is get media attention. Even the Financial Sector Legislative Reforms Commission is being manipulated to making existing regulatory system ineffective and centralise controls in the finance ministry/GOI. The initial effort to super-impose a body to oversee the functioning or coordinate among various regulatory bodies and give it a permanent and legal status had ab initio met with a negative response. Now the government is trying alternate routes to encroach on the autonomy of individual regulators. The threat to RBI deputy governor Subir Gokarn’s extension, FM’s threat to “walk alone” and the media report about “Finmin Scan of RBI’s Balance Sheet” are all proving these fears right.
The sound health of the financial sector can be ensured only by allowing all regulators and supervisors in the sectors including RBI, SEBI and IRDA to feel the freedom to perform their mandated responsibilities efficiently, within the statutory framework. Presently, their well-intended policy initiatives and even administrative actions are being pre-audited and guided by a finance ministry which itself is suffocating under compulsions of coalition politics.
The prime minister, who knows the harm strained relationships between regulators and FM can cause to the economy, must immediately intervene and try for a breakthrough. If the buck doesn’t stop there, we will see more and more of controversies like the present one, capable of destroying the gains made by the Indian economy, mostly during the period Dr Manmohan Singh was in charge.
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is a former general manager of Reserve Bank of India. He can be contacted at [email protected]