Why do ministries interfere with the functioning of statutory bodies?

Statutory bodies like the Reserve Bank of India should not be made subservient to the whims and fancies of officials in ministries for exercising the powers they are expected to exercise as part of their mandated functions

Finance minister P Chidambaram has denied any rift with the RBI (Reserve Bank of India) and has concluded that the equation between the government and the central bank in India is the same as the equation between the government and central bank of any country. “It is always arguing for growth on the part of government and arguing for stability and taming inflation on the part of the central bank”, the FM is reported to have told media persons. 
This conforms to the RBI governor’s own observation earlier this month that he had checked with other central bank heads and found that relationship issues are the same in other countries too (I think, the occasion was a meeting attended by several central bank governors and treasury heads, which was attended by Mr Chidambaram also!). It has to be said to the credit of Dr Subbarao that he had understood this earlier and observed in an interview immediately after the “walk alone” threat from the finance minister thus: “I don’t feel very lonely. I think people are making too much of the finance minister’s response to our policy action. After all, we have shared goals. Both of us want high growth and low inflation. And there is a division of responsibilities. There is a point of view that we must walk together. But, you know, what is called walking together is understood differently. I think that will be resolved in the course of time.”
So far, so good. The confusion in the media about GOI-RBI friction evolved from the way in which the FM under pressure almost asked RBI to cut base interest rates in October, made a statement that RBI can go ahead with preliminary work for issue of new private sector bank licences without waiting for changes in Banking Regulation Act and gave freedom to his ministry officials to instruct banks on issues which the RBI thought were under the domain of the central bank as the banking regulator.
Finance Minister P Chidambaram, today, is a man in a hurry. Any FM of a country of India’s size and economic problems should be. But the speed should not blind vision or overtake priorities. The pressure being put on banks and the banking regulator makes one think on these lines.
Last week a letter said to have been written by the finance ministry to the RBI on new bank licences was quoted by a newspaper. The letter seems to assert that the powers RBI is seeking via an amendment to the Banking Regulation Act, 1949, are already available under various legislations and the amendments would be passed within six months during which period the RBI can go ahead with accepting applications for new banks and start processing them.
If the finance ministry is confident that an amendment is not necessary to ‘give’ the powers sought by the RBI (which include powers to supersede the board, to authorize the acquisition of shares beyond 5% as well as powers for consolidated supervision and dispensation necessary to deal with companies that entered the banking sector), for approving new banks, why not convince the RBI about the position? Why is the FM announcing to the media that the ministry has ‘written’ to the RBI to receive applications and start processing? How can any genuine promoter submit an application without knowing the regulatory environment in which the new bank will be functioning, in the first place?
During October, reports were there that the finance minister had asked RBI officials whether the banking regulator could be given these powers without an amendment to the Banking Regulation Act. The RBI governor said in an interview on 31st October that the central bank could not offer an informed response to this query from the FM, because the RBI believed that it needed those powers. North Block seems to have ignored the message in Dr Subbarao’s comment. The message was RBI would be happy if the powers come through a legislative amendment. The powers ‘given’ outside the provisions of the Act could be with stings and can also be taken back in a different situation through the same process (without a legislative process).
Statutory bodies like the RBI should not be made subservient to the whims and fancies of officials in ministries for exercising the powers they are expected to exercise as part of their mandated functions. The RBI has faced problems on such issues relating to banks earlier due to blurred clarity in powers and interpretation of law. Perhaps, the RBI has learnt from the recent experiences while handling new generation private sector banks which did not survive and the interests of the clientele had to be protected by the regulator with GOI support.
Last ten years or so, the RBI has been loitering around North Block for permission to continue a pension updation granted by RBI in exercise of powers available under the Reserve Bank of India Pension Regulations which is being questioned by the finance ministry that has interpreted the pension regulations differently. An amendment to RBI Pension
Regulations made to conform to the GOI interpretation of the regulations is pending with finance ministry for more than a year.
Such experiences too, can put the RBI on guard while acting on trust. The pressure on banks to open Aadhar-based accounts for transfer of ‘benefits’ under the pilot project in 51 districts even before the credibility of UID is established is another move from the FM flagging the lopsided priorities of UPA-II which is in a hurry to show results before approaching voters!
To read more articles by MG Warrier, click here
(MG Warrier is a former general manager of Reserve Bank of India.)
nagesh kini
1 decade ago
From professional experience I vouch for the fact that the RBI is the best authority to deal with as it is relatively taint free.
We need more upright YV Reddys and D.Subbaraos to stand up to
"intellectually arrogant" - the term used by Congres'own Digvijay Singh to describe PC - FMs.
Thank God for RBI and CAG are constitutionally mandated who will brook no interference from North and South Blocks!
Replied to nagesh kini comment 1 decade ago
I do appreciate your comments. But the efforts to weaken institutions are from several vested interests. All statutory bodies including judiciary and the entire public sector are victims. The haste with which Financial Sector Legislative Reforms, New Pension Scheme, UID etc are being pushed through, destabilising the top (see the experience of UTI, RBI etc) are all manifestations of the same thought process. There is a limit for individual resistance from people like T N Seshan, Kalam, Y V Reddy, Vinod Rai, Subbarao and even Dr Manmohan Singh or A K Antony, if you feel they are trying their bit.
1 decade ago
Why do ministries interfere with the functioning of statutory bodies?

I will tell you why:
Because they are stupid (those who does interfere; Ex: when you don't understand the role of RBI and build a pressure on then, publicly, you are either stupid or working against constitutions' values and I am happy to give a benefit of doubt to our finance minister PC ). I think, PC (unfortunately my Sr at Harvard) belives that he is better (qualified) than RBI Gov.
He may also be extremely arrogant and may not like to take no for an answer.
Or, he doesn't understand finance the way he understand the politics or not being advised by wise people.
Many people from Harvard have ben like this when they become a leader (Bush was another one)
If any of you wants to get in touch with me, use my email and I will give you more detail reply about my opinion.
Replied to Winmyid comment 1 decade ago
I appreciate your forthright views. Moneylife and I would look forward to any suggestions for bringing about a change in the attitude of individuals with the kind of character you have described so that millions of people who are affected by their approach to people, institutions and policies will get some relief. We may not be able to replace people in position. But some change in their attitude may make a big difference.
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