There is an expectation that the standoff between the Reserve Bank of India and the Government might end in a compromise when the central bank’s board meets on Monday, November 19. For, both sides have seen that there is nothing to be gained, and a lot of pain to be inflicted on the economy, if the positions the two have taken remain irreconciled. A mid-way has to be found. And it was in that quest for a compromise that RBI Governor Urjit Patel met Prime Minister Modi last week.
Hopefully, the outcome of the meeting would eventually lead to what is the best possible solution to the urgent problems under the circumstances. There is no denying that the government is deeply concerned about refinancing the cash-strapped Non-Banking Financial Companies and to increase liquidity of public sector banks. The problem assumes further urgency in view of the stressed financing conditions for micro, small and medium enterprises. In an election year, these concerns gain far more significance for the ruling dispensation which would naturally like to improve the well-being of the numerically large sections of the economy. Even without any extraneous considerations, the need for funding these sections is paramount. These have been hurting, especially after the 2016 demonetisation jolt.
NBFCs, partially due to their own extravagance and malpractices, are in a bad shape, with some of them under the regulator’s scanner for criminal abuse and worse. Yet, there is no way the baby can be thrown out along with the bathwater. Following a thorough screening of the sector, a number of NBFCs need to be armed with fresh liquidity so that micro-small and medium-sector entrepreneurs can once again draw working finance. Again, the real estate developers are hit badly due to the NBFC crisis.
This, too, has come as a mixed blessing. The rotten eggs in the real estate sector are unlikely to survive the on-going regulatory vigil, including the compulsory adherence envisaged by the Real Estate (Regulation and Development) Act. However, care has to be taken that the otherwise sound developers with large land parcels and commercial and residential estates, do not come to grief for want of adequate working capital. As the single-largest employer, the real estate sector needs to be helped back on its feet — and not abandoned, especially when meager savings of millions of middle and lower income families are at stake in the stalled projects.
Cash flow to the real estate sector therefore has to be maintained at all costs in the larger interests of the people. The other differences between the central bank and the government do not appear to be so insurmountable, though undeniably the latter would like to get more dividend, more funds from the former from its cash reserves. The latter is a question of mathematical formulae depending on each protagonist’s idea of a safe reserves limit for the central bank and the cushion it must maintain for a rainy day. The point is that resolution of the immediate stand-off impinges on the bread-and-butter concerns of a large section of the people and must be found to the satisfaction of all the parties concerned.
Meanwhile, though there is a long and well-recorded history of the central bank and the government remaining locked in conflict over a long period, particularly about the prime lending rates, unfortunately, the RBI took its pique public when Deputy Governor Viral Acharya virtually stood the Centre in the dock. Playing victim to elicit wider public sympathy ought to have been a strict no-no for either side when the common objective is boosting growth.
The RBI ought to be at ease that the NDA Government at long last set it virtually free for determining the monetary policy, linking it to clear-cut inflation parameters. Regulatory functions of the RBI as a watchdog over the entire banking sector, too, were given teeth for the first time under the bankruptcy law. Institutionalising these changes is not only a huge plus in the decades-old relationship with the central bank and the central government, and for this the credit must go to the present regime without an iota of doubt. Yet, the misunderstanding stemming from the conflicting priorities of the RBI and the government ought not to have been allowed to slip into the public space.
Hopefully, the November 19th meeting of the RBI Board will put behind the recent recriminations and smoothen the most vital relationship between the sovereign and the central bank.
– Editorial