Always a fine balance Editorial 2nd Nov'18 TheHindu

Headline : Always a fine balance Editorial 2nd Nov'18 TheHindu

Details :

RBI deputy governor on RBI's autonomy:

Recently, RBI deputy governor Viral Acharya had highlighted to the media the differences between the RBI and the government on some issues.
He argued that the government was impinging on the autonomy of the central bank.
He warned that the Governments that do not respect central bank independence will face trouble in the financial markets, and will regret undermining an important regulatory institution.

Government's responded saying the elected government is accountable to people:

In response, the government, without elaborating, noted that the central bank's autonomy is "within the framework of the RBI Act", as opposed to unrestrained autonomy.
The Union Finance Minister said the country was higher than any institution and it was the elected that were accountable.
He said that both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.
The government was also unhappy with the RBI going public in expressing its displeasure with the government.

The tussle raise queries on where the balance lies:

This is a tussle between an institution covered by an Act of Parliament and the executive, with one fighting for its autonomy and the other for its interests.
Where does the fair balance lie?

Autonomy of RBI and its limits:

We need to understand the ‘autonomy’ that the RBI enjoys and the limits to that.
This is not the first time that the RBI’s autonomy has come under focus.
Successive Governors have fought against what they felt were transgressions — formal and informal — on the central bank’s autonomy by powerful Finance Ministers.

Government says limited autonomy:

The statement put out by the government underlines the message very clearly: the RBI is autonomous but within the framework of the RBI Act.

ex Governors also say RBI is independent, but within the limits set by the government:

Ex RBI Governor Y.V. Reddy noted that the RBI is independent, but within the limits set by the government.
He explained his understanding of this autonomy under three functions:

Operational issues - in which he believed in total freedom for RBI
Policy matters - where he preferred prior consultation with the finance ministry
Structural reforms - where he worked in “very close coordination” with the government.

Ultimately supremacy of the sovereign (government):

Dr. Reddy conceded that the sovereign is ultimately supreme as per the section 7 of the RBI Act.
Another ex RBI Governor Dr. Subbarao also points that the existence of Section 7 in the RBI Act, even if it has never been used till now, proves that the RBI is not fully autonomous.
Section 7 the RBI Act:

Section 7 of the RBI Act allows the government to give written directives to the RBI in the public interest.
On critical issues, often the choice for the Governor is to concede to the government with or without a written directive.

But tradition has been that both the government and the RBI have avoided recourse to this provision.

Clearly RBI does not have absolute autonomy:

It is thus clear that the central bank cannot claim absolute autonomy.
It is autonomy within the limits set by the government and its extent depends on the subject and the context.

Reasons why Government is given final say under RBI Act:

There is a clear reason why, even while it is conceded that control of the nation’s currency should be with an independent authority removed from the sway of elected representatives, the RBI Act has the veto option in the form of Section 7.
And that’s because it is not the technocrats and economists sitting in RBI who are accountable to the people but the elected government.
The representative cannot split hairs before the voter while explaining the economy’s performance — he has to own up for everything, including the RBI’s actions, as his own.

Full autonomy could be undemocratic:

In a democracy, it is unthinkable that we will have an institution that is so autonomous that it is not answerable to the people.
The risk of such an institution is that it will impose its preferences on society against the latter’s will, which is undemocratic.
Seen from this perspective, the limits to the RBI’s autonomy will be clear.
It is autonomous and accountable to the people ultimately, through the government.

Any differences usually settled internally:

The onus is on responsible behaviour by both the RBI and the government.
The Governor has to be conscious of the limits to his autonomy at all times, and the government has to consider the advice coming from central bank in all seriousness.
Section 7 has never been used only due to the mature handling of differences behind closed doors, and the sense of responsibility that the government and the central bank have displayed.
Unfortunately, in the present situation, the differences have come out in the open.

Current situation must be used to clear the position of the RBI:

The latest tussle between the executive and the central bank will eventually end, in all probability with a compromise.
However, its purpose would have been served if the debate leads to greater awareness on both sides of the other’s compulsions.
Better still, if it leads to a clear definition of the RBI’s responsibilities.

Way ahead - clear enunciation of the RBI’s responsibilities:

It is to avoid situations such as the current one that former RBI Governor Raghuram Rajan argued for a clear enunciation of the RBI’s responsibilities.
He points out that the position of the RBI Governor in the government hierarchy is not defined.
The Governor draws the salary of a Cabinet Secretary, and it is generally understood that he will explain his decisions only to the Prime Minister and the Finance Minister. But there is confusion as bureaucrats also seem to want to have a say.
Thus, there is a danger in keeping the position ill-defined because the constant effort of the bureaucracy is to whittle down RBI's power.

Importance:

GS Paper II: Indian Economy

Upsc Wing