THE SO CALLED AUTONOMY AND RBI.

7/29/2019 THE SO CALLED AUTONOMY AND RBI.

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The so-called autonomy of the RBI to serve Govt. Policy

The Reserve Bank of India Act 1934 accepts Central Government

directions to the RBI after consultation with the Governor of the Bankand generally eminent economists are expected to hold the post of theRBI Governor like. RBI is saddled with the crucial responsibilities toadvice the government on appropriate measures to ensure non-inflationaryexpansion of money supply, the handling of budget deficits, currencyvolatility, the hot money inflow into the stock market, etc. In India for the

past several years RBI governors, generally bureaucrats, are handpickedby the powers that be to be subservient to the government following theWorld Bank / WTO diktat, including credit control and foreign exchangemanagement. In fact the government is practically in control of all so-called independent and powerful regulatory bodies like RBI, SEBI, etc.The most well-known and widely publicized example in recent years wasthe open dissent in 2005 by the RBI of the ministry of Financesunhealthy desire to encourage capital inflows via participatory notes. Inthe last few years, every time the RBI tried to implement a dear money

policy forcing a higher interest rate regime to contain money supply andinflation, the Finance Minister met the Chairmen of nationalized banks ,India Inc.,immediately after the RBIs credit policy announcement tostress the need for keeping interest rates lower for keeping the economyafloat in strains. In the same way, the State Bank of India, a Reserve Banksubsidiary, raised its prime lending rates, the Finance Ministry intervenedwith cautionary note as such steps were to offend the industrial barons.The UPA governments irresponsible role Vis a Vis the RBI was quiteobvious during the skyrocketing inflation in 2008. Till May 2008, thegovernment played down inflationary surge justifying it as a temporary

phenomenon and would taper down very soon. The RBI was virtually leftineffective, allowing inflationary rate to soar as high as 12 percent. TheRBI as a regulatory body was practically reduced to taking occasional

measures for tighter credit policy forcing banks to rise lending and depositrates. By mid-August 2008, the term deposit rates for the governmentadministered small savings from the public remained well below two

basis points less than what the banks offered following the RBIs revisedcredit policy. The main reason behind the governments opposition to anincrease in small savings rates emanated from the perceived adverse


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impact on mutual fund operators and stock markets.It is notable that the decisions taken by the RBI in this period of globalfinancial crisis have been subject to the scrutiny of the Ministry ofFinance. During the tenure of Y.V. Reddy (2003-08) the ministry of

Finance (under the UPA dispensation) made no bones of its dislike of theRBIs unwillingness to open the doors completely to foreign capital ofany and all kinds, while the RBI struggled to neutralize the effect ofinflows so that the economy did not overheat. It is self-evident that if theMinistry of Finance had completely prevailed over the RBI during 2004-08 in making the economy even more awash with US dollars, Indiawould be in a far more vulnerable situation today, whether on the questionof keeping the door wide open for unrestrained FII capital, or in the risingthe ceilings even higher for external commercial borrowings, or in

permitting more aggressive lending practices by banks, the RBI playedsome limited restraining role in checking the ministrys dancing to thetune of global financial capital. This does not however exonerate the RBIfor its non-interference in the prime lending system completelydisregarding the agriculture sector of the economy and allowing the layersof money market transactions indulged in by low deposit-based foreignand new private sector banks in determining the interest rate structure,creating distortion in the real economy.

In any case, the government wants the RBI to fallow in toto disregarding

the so-called status of RBIs autonomy. The RBI cannot go the other wayin this time of acute financial distress by taking any measure that weakensthe inherently distorted economy serving the industrial and financialtycoons. Such a role was evident in October-November 2008 when theRBI had taken unprecedented step to augment liquidity in the financialsystem on such a large scale and in such quick succession. The release ofabout Rs.1, 40, 000 crore liquidity by slashing 350 basis points of the cashreserve ratio (CRR) within the space of 3 to 4 weeks, the simultaneousrelease of additional liquidity support to the extent of 1.5% of demand and

time liabilities (DTL), equivalent to Rs.60,000 crore, to be usedexclusively by the banks for funding the requirements of mutual fundsand non-banking finance companies along with reductions in the repo ratefrom 9% to 7.5% in order to save the economy mired in speculationtriggered crisis.


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Now in tune with this tug of war hysteria trend , RBI GovernorDuvvuriSubbarao who steps down in September met markets more thanhalf way by lowering the benchmarkinterest rate and banks' cash reserveratio which was constant for 19 months at 6% by 25 basis points, but

cautioned that risks loomed on the horizon. He raised red flags on therecord high current account deficit and stubbornly high food inflation,which could force him to reverse his stance in the coming months. "Thefirst risk is food inflation. That can put upward pressure on inflationexpectations and there will be pressure on monetary policy to respond,and indeed there is an obligation to respond."

Palaniappan Chidambaram, finance minister, s recently travelled to HongKong and Singapore and is now in Europe to tell investors that hisgovernment is determined to entrench reforms aimed at encouraginginvestment.Finance Minister P. Chidambaram acknowledged that the"ball was in the government's court" to revive growth, and pledged to

present a "responsible" Budget for the fiscal year 2013-14 It is a positivestep which will infuse liquidity and help in catalysing growth, IndustryMinister Anand Sharma .

India Inc. &bankers today hailed the Reserve Bank of Indias move toreduce repo rate and CRR by a quarter per cent, saying it will spur growthand ease the prevailing tight liquidity condition.

Some economists recommended interest cuts to spur growth, but theReserve Bank of India was firm on keeping interest rates at the currenthigh levels until fiscal deficit is brought under control seen as thereason for high inflation for nearly 19 months .

Who Cares for the Unorganized Sector?

While the simultaneous dole packages of thousands of crores of rupeesare declared by the UPA government to save the sagging bigindustrialists, the vast unorganized sector is being deliberately bypassedin a state of deepening slowdown. There are about 58 million enterprisesin the non-firm unorganized sector, each with investments up to Rs.25lakh and fewer than 10 workers, contributing to about a third of the grossdomestic product. This is the figure supplied by the National Commission
http://economictimes.indiatimes.com/topic/RBIhttp://economictimes.indiatimes.com/topic/interest-ratehttp://economictimes.indiatimes.com/topic/food-inflationhttp://economictimes.indiatimes.com/topic/RBIhttp://economictimes.indiatimes.com/topic/interest-ratehttp://economictimes.indiatimes.com/topic/food-inflation


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for Enterprises in the unorganized Sector (NCEUS). While the fate ofthese units is intermeshed with that of large and medium industries, theircredit needs in the current severe crisis are deliberately ignored with allattention focused on the big bourgeoisie caught in the maelstrom of

present global crisis. According to the NCEUS, enterprises with aninvestment of up to Rs.5 Lakh accounted for just Rs.59, 279 crore or2.2% of bank credit as of March 2007. Those enterprises in the Rs.5-25lakh category accounted for another 2.1%. What is worse, only 2.4million of the unorganized units received credit from Banks, criticallythrowing the vast unorganized small and medium sector to a dire strait.On paper however, the RBI guidelines allow banks to sanction loans up toRs.5 lakh without collateral. Such reluctance is the outcome of banking

policy under the LPG regime.

Various artificial props like throwing open portfolio investment toForeign Institutional Investors (FIIs), asking Public Sector banks toincrease their exposure to the capital market both directly and indirectlyand exemption of dividends from income tax have been given. The resulthas been severe shifting of the Indian Public sector banks. Moreover,liberalization of banking marked a major shift of finance from

productive sector to consumption. The RBI Annual Report 2006-07 noted

that the share of personal loan (i.e. loans for housing, education,automobiles, consumer durables, credit card expenditures, etc.) in total

bank credit extended by scheduled commercial banks increased from 6.4per cent at end March 1990 to 23.3 per cent to 23.3 per cent at end-March2006, driven by housing as well as non-housing loans. While the share ofhousing credit in overall credit rose from 2.4 per cent to 12.0 per cent thatof non-housing retail credit rose from 4.0 per cent to 11.3 per cent. Bycontrast, over the same period, the share of agriculture in Bank credit fellfrom 15.9 per cent to 11.4 per cent and that of small scale industry

plummeted from 11.5 per cent to 6.5 per cent. The above makes itabundantly clear the prescription for banking sector reforms followed bysuccessive governments in India.

Interest rates cuts subsiding rich


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The time has come to start charging industry the right prices for resourcesthat it gets virtually free

There is stubborn inflation, high interest rates and low growth keepingIndias SDI/HDI low. Then why are we avoiding the obvious and simplesolution?

We are going through a prolonged period of high inflation that seems tohave no real solution, forcing interest rates to be kept high and affectingGDP growth.

While several positive measures are being taken to rein in the fiscal

deficit, at the cost of impacting the aam aadmi, by way of a reduced gascylinder subsidy, decontrol of diesel prices and a possible increase infertilizer prices, or by trying to save through improvements in the PublicDistribution System and direct cash transfers, we may not get to where weshould in terms of reining in the fiscal deficit.

The prices of natural resources and energy have risen steeply; the pricesof manufactured goods too have risen steeply on the back of very highinput costs.

Our export competitiveness in most manufactured items seems to besuffering consequent to high input costs and despite a much weakenedrupee. High interest rates are just one of the reasons.

Therefore, we need to look beyond conventional ways of reducing fiscaldeficit to rein in the huge deficit without making compromises onaccelerated infrastructure improvements, and through it signal interest rate

reduction and growth to improve our inclusiveness in growth.

All along, we have been focusing on reducing the subsidy outflow to theweaker sections, without looking at reducing the subsidies enjoyed by thevery rich. Often we believe that giving subsidies to the very rich by wayof near free resources will result in cheaper manufactured products oroffered services. This is completely untrue. In fact, those who get these


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resources are the ones who are selling their manufactured products muchhigher than international prices by getting themselves several policies putin place to protect their pricing power

While the neo-liberal programme condemns subsidies such as those onfood and fertiliser, and the supposed subsidy on petroleum, it promotes anarray of subsidies to the private corporate sector. These subsidies takevarious forms .interest rate cut is one of the forms.

There are large transfers disguised in form of sums owed to the State bythe corporate sector which the State makes no serious attempt to collect.Large borrowers with 11,000 individual accounts accounted for as muchas Rs 400 billion of total bad debt of banks by 2001-02. Among publicsector banks too high-value defaults involving 1,741 accounts over Rs 50

million amounted to Rs 228.66 billion. (Even these may beunderstatements, since banks tend to evergreen corporate loans,

providing fresh loans in order to prevent default.)According to a studycommissioned by industry body ASSOCHAM,The net non-performing assets (NPAs) of the banking sector in India are

increasing at an alarming rate and may cross Rs 2 lakh crore for the

fiscal year ending March 2013 from Rs 1.57 lakh crore as on June 30,

2012.Also, banks restructured advances would also be as high as

about six per cent by March, 2013. Whereas banks frequently attach the

entire property of defaulting peasant borrowers and even have themarrested, no such stringent measures have been taken with the big

borrowers, and, unsurprisingly, efforts to recover bad debts have met withlittle success. Banks bad debts have been reduced over the last few yearsnot largely by collection, but by lengthening the schedule of repayments,making provision for bad bad debts out of banks profits earnedelsewhere, and infusion of capital by the Government into the publicsector banks. Large uncollected tax arrears, amounting to about Rs 390

billion on corporation tax and Rs 200 billion on customs duty, excise, and

service tax, amount to another implicit transfer to the corporate sector.

A second major subsidy is tax concessions. One should keep in mind thata tax concession is no different from a subsidy: it is the equivalent of theGovernment returning to the tax payer a portion or the whole of tax

payable by him/her. The total of tax revenue forgone on corporation tax,excise duty and customs duty was estimated at Rs 2.36 trillion in 2007-08,


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which was over half the total revenues actually connected under theseheads in that year. (Apart from this revenue forgone on personal incometax was Rs 421.61 billion, which was 35.5 per cent of the revenues fromindividual tax payers. To repeat, the Surveys opposition to State

intervention in the economy is selective: It opposes such Stateintervention as protects the people at large from the ravages of the privatesector; but it envisions a vastly expanded role for the State in micro-monitoring the people, wielding bureaucratic despotism over them, andusing arbitrary methods to exclude large numbers from the meagre

benefits some of them hitherto enjoyed. It is an enabling State forcertain classes, a disabling State for the vast majority.

While iron ore sells at Rs.6,000 plus per ton in the international market,those with captive mines are able to extract it at less than Rs.1,000 perton. Similarly, coal costs less than 25 per cent of domestic prices to thosewho have captive mines and at a much lower percentage when comparedto international prices. The same is the case with other resources like

bauxite, limestone, river sand and granite. Resources are being madeavailable at less than 15 per cent of international costs by the States andthe Centre.

The people of India, to whom these resources belong, are forced to givethem away near free at these cut rates by elected rulers, and they do not

get the benefits of the difference between the market price of themanufactured product and the giveaway price of the resource. Thesevirtual freebies to the rich are far in excess of Central and State deficits

put together.

The time has come for those who are elected to represent and protectpeoples interests to start market pricing resources that are now beingaway almost free to the very rich. This would solve all our fiscal sideissues at one go and get us to double digit growth rate in quick time. This

would go a long way in improving the quality of life of our peoplesubstantially. It would also help us get to interest rates on a par with thedeveloped world.

There is dominant thinking in our policy framers that relaxing interestrates,greater policy incentives to the corporate world will spur theeconomic growth, while it is true at some measures but it is not the


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whole story. The Gov't should remember it may be counter productive toits goal of inclusive growth. The accumulation of riches in few

billionairs of India who constantly figure on forbe's list tells itall. The pathetic social and development indices of our country, far

behind many of developing countries is an alarming situation. Whilefinance minister gives audience to corporate leaders before budget,whynot extend the same to grass root level social activists who seek to

bring changes in much needed human development in India?

Indian state and governments have so-long mimicked the capitalist centersof the world substantially fallowing speculation-based growth allowingFIIs, various toxic instruments to serve the economy for a small section ofrising middle class by allowing enormous leverage to the MNCs, WorldBank and other foreign institutions to control the economy. The e BanksIndia will once gain has offered home loans at a concessional rate of fora limited period. It will also extended that to other consumer loancategories like automobiles. All this is to beef up the declining automobileand real estate markets. such mortgage loan in order to bring thecustomers is for mimicking US mortgage lenders in the sub-primemarket.

Earlier, close on the heels of Barack Obamas current round of hugestimulus of $787 billion , Mr.Pranab Mukherjee, then finance minister

declared on 24 February, the third stimulus package by huge tax cuts formanufacturing companies, consumer durables, steel and cement,automobiles, SEZs, etc. The revenue loss of an estimated Rs.30, 000 crorein a full year is aimed to rescue the faltering business of corporate houses.Industry however claimed for another round of interest rate cuts to

buttress such fiscal measures. The RBI will inevitably trim bench markrates soon to support the pro-corporate UPA government policy. AlreadyThe real deposit rates are negative and the real lending rates at about

250 bps are much lower than the long-term average of 400 bps While

such blatant pro-corporate generosity is all evident in the RBI policies, theRBI has by this time unleashed the attack on pensioners by announcingcurtailment of pension benefits. This is a blatant denial of one of thefundamental rights of pensioners.In our country as in most other countries, subsidizing the rich at theexpense of the poor is commonplace. All advanced societies are nothing

but systems perpetuating hierarchies of exploitation, where a select few


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wield power over the hapless masses.In this constellation, it is OK to squash those that are even less fortunatethan yourself and pay obeisance to the "mai baap" sitting on top. Ourcivilization, having survived unbroken for the last 4000 years has

accentuated this problem.

We'll willingly spend thousands of rupees for any crap sold in afashionable mall but immediately haggle over 10 rupees with theautorickshaw driver or the poor hawker on the streets. What is happeningwith street vendors in Mumbai must be interpreted in this light.

Moreover, the rich and powerful can and do buy any government andinfluence decisions. Perhaps a French Revolution every few centurieswouldn't be so bad for us!

S.Srinivasan

President ,

NUBE( NATIONAL UNION OF BANK EMPLOYEES)

THE SO CALLED AUTONOMY AND RBI.

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