Stories about these skirmishes make for fine oral history of public policy and central banking. One such story is about the RBI emissary explaining to a former finance minister that no dividend can be paid because the law requires rules to be prescribed to govern payment of dividend, and no rules had been notified yet. The then finance minister is said to have called in a stenographer to dictate rules on the spot, so that the RBI may pay dividend to the government.
Even for any general company that pays dividend to its shareholders, it is ideal to have a dividend policy that would govern the terms on which the decision to pay dividend would be taken. The RBI is not a commercial enterprise in which shareholders — the President of India — can routinely ask for dividend to get a share of profits from a commercial activity, which is what makes the need for a policy more important. But public arm-twisting and public rebuffs have left a poor taste in the mouth. Responding to the view expressed by the RBI deputy governor — that markets punish governments that hurt independence of central banks — the finance secretary tweeted how the Indian rupee exchange rate with US dollar and the price of petrol are indicators of how the market is not punishing the government for troubling the RBI. In an era of “dog whistle” politics worldwide (Google “dog whistle”) the signal is that the government would indeed trouble the RBI and is proud that it is not incurring the wrath of the market. Never before has the nature of the discourse stooped lower.
Usually, demands by industry that the RBI should loosen credit availability and resistance from the RBI, expressing concerns over feeling inflation, is what the government-RBI skirmishes are about. Currently, the skirmishes have travelled way beyond that sphere. Add to the mix, the pressures from US-based payment systems like MasterCard and Visa being upset about a regulatory requirement of storing data locally, and the government seeking to move the regulation of payment systems away from the RBI. In short, a very complex mix is at play. A public spat is no means of resolving complexity in the differences, unless of course, the idea is to make the differences simplistic and assert power play.
Illustration by Binay Sinha
The alleged threat of using Section 7 of the RBI Act, is the ostensible flashpoint — it is a provision that enables the government to issue directions to the RBI, but only after consultations with the RBI governor. Similar provisions in all other regulatory legislation — be it the one governing the capital market regulator, the insurance regulator, the pension regulator, bankruptcy regulator, food regulator, and indeed any other regulator — provide that the government must give the regulator an opportunity to express its views but only “as far as practicable”. For good measure, the decision of the government is explicitly provided as being final.
No court has had to rule so far on what “consultation” with the RBI governor would entail — it cannot be an empty and perfunctory procedure, and in the absence of a declaration that the government’s view would be final, it would be a messy affair for a government and a central bank to be seen in a formal legal dispute. Such a dispute would be quite akin to the litigation involving consultation before dismissing a state government, or consultation with a Speaker about whether a draft law is a money bill — and it would be a messy bloody battle with serious repercussions.
This is the kind of provision that is used in any environment to control any board of any institution. When there is a power given to a shareholder to exercise discretion to issue a fatwa, a necessary corollary is that the governance of the institution is coded into a framework of large-scale interference. Such powers can be regarded as the “nuclear option” and do not even need to be used — so long as they exist, one can expect the institution to dance to the tunes of the person who has the power to issue directions. The directions are then verbal, off the record, and go into the zone of “moral suasion” where one does not have to “formally” use it at all but has to only indicate. In other words, to quote LK Advani’s admonition of the media during the Emergency of 1975, when asked to bend, the institution would crawl. If rumours are to be believed, it is Section 7 that was pressed into service to get the RBI to recommend to the government to declare the demonetisation measure that was announced on November 8, 2016.
It is time to remind ourselves of one more piece of oral history. The learned Prime Minister P V Narasimha Rao of early 1990s vintage is reported to have welcomed Justice MN Venkatachaliah on his appointment as chief justice and warmly suggested that the relationship between the Prime Minister and the chief justice should be a cordial one. The learned chief justice is reported to have replied that a “cordial” relationship between the chief justice and the Prime Minister would not be good for either of them or for the nation. What they ought to strive for, he replied, should be an “appropriate” relationship in terms of doing their respective tasks under the Constitution.
The author is an advocate and independent counsel. Tweets @SomasekharS