Montek Singh Ahluwalia is an economist and civil servant who was the deputy chairman of the planning commission. He was previously the first director of the Independent Evaluation Office at the International Monetary Fund (IMF). Ahluwalia said the powers of the board of Reserve Bank of India (RBI) upon the use of section 7 have to be made clearer. He also said raiding the RBI reserves is not a credible way for the government to reduce the fiscal deficit and that is actually an accounting trick.
Watch the full interview here .
In an exclusive interview to CNBC-TV18, Ahluwalia said historically, there has always been some tension between RBI and finance ministry. He also discussed the outcome of the RBI board meeting, among other topics.
Edited Excerpts:
What did you make of the statement that was issued by the RBI in general but specifically on the economic capital framework? The government and the RBI will together set up a committee to look at this issue but we just heard from the Niti Aayog vice chairman saying very clearly that he believes they will execute it in this financial year itself?
I think the press built-up what looked like a conflict situation and that would have been very unfortunate. I am sure that financial markets welcome the fact that we do not have that kind of conflict. There has been a long board meeting, they have agreed to do certain things, there is not a sense of the RBI being pushed to doing things that it really doesn't want to do.
On the other hand, it is clear that between the finance ministry and the RBI historically there has always been a certain amount of tension and I don't think anybody minds that. However, it needs to be managed in a way which doesn't look as if the system is breaking down. I am glad that the way things have turned out, nobody is saying that the system is breaking down, let us see what they do in the future.
Specifically on the economic capital framework because that has been a contentious issue and now the decision is that a committee will be set up to look at that issue and look into the future implications of this framework. What would your expectations be? We have had committees in the past examine this issue, what would your expectation be in this context and given the fact that we have got an election coming up in May next year?
If you are referring to the issue of how large the RBIs capital reserves should be and whether some portion of this can be transferred, my feeling is that this whole fuss of trying to make an economic issue of this is not actually well grounded.
The RBI can always print money, stability means the total money that it prints - what you might call the increased reserve money in the system, should be constrained to whatever is felt to be consistent with a reasonable rate of inflation and growth and so on.
If you take away a lot of money and give it to the government under whatever pretext and if the RBI maintains the stability that will just reduce the amount of reserve money that they issue into the rest of the system. So, the net effect from the government's point of view is not particularly different.
I personally do not think that raiding the RBI reserves is a credible way of appearing to reduce the fiscal deficit, that is an accounting trick actually. The fact of the matter is these very large reserves, most of it is foreign currency revaluation reserves. You can always get the RBI to transfer money but it has to control the total amount of money that it prints. So, if you take away more through this window then they will have to squeeze somewhere else. If they squeeze somewhere else it is the same thing as you are increasing your fiscal deficit and crowding out the private sector. So, it is not as if this is a free lunch that some calculation here will enable you to get a real resource that was lying unused, that is not actually true.
What the committee does, all the charter, I am not really aware of.
First, let me begin by defending my fraternity. The media did not start this war at all. RBI deputy governor Viral Acharya in a speech pointed out that if the governor resigns because of injustice has done to the reserves of the central bank it has had repercussions. My sense is that from Reserve Bank sources that speech was done only because all methods of persuasion had not succeeded and then we came to know that consultation has started under section 7 – a section which the government has so far never used over 70 years of the bank’s existence. Thereafter there is a tweet from the finance ministry criticising the kind of speech made by the deputy governor this was all out in the open so there was a fight, a serious disagreement, a threat of using section 7. Do you think at the end of this turmoil the Reserve Bank has come out looking weaker?
I don’t want to comment on tweets and tweets have now become an established kind of communication at very high levels of government all over the world. I still resist the temptation to react to tweets. It is not my idea of how government should be done.
However, let me just make one or two points. One is that I do not think that on issues of the Reserve Bank and the finance ministry the world should be informed quietly by officials talking about it. Frankly, in many jurisdictions, the governor and the finance minister meet periodically and that is very important. Leaving it to lower level officials is not a good idea.
So, personally, I have always felt that once a month or something like that the governor of the Reserve Bank and the finance minister should meet their principal deputy’s and they should layout what are the issues they are going to discuss so that at any given time people are not speculating on the basis of what lower levels officials are saying. That is every crucial.
Now, obviously, if the two really disagree then since the government is sovereign it always has more power. But we ought to have some reassurance that what we are reading in the newspaper is the outcome of the discussions at a high level, not at the lower level. I open the newspaper and I find unknown, unnamed officials in the Reserve Bank are saying something, unnamed officials of the finance minister are saying something frankly I don’t think this is a sensible way of communicating to the markets. I think the basic idea that we are now integrated with the global economy you got to conduct ourselves the way the rest of the world does.
Let me tell you that I am quoting the recorded statements. Viral Acharya’s statement was on the record. The DEA Secretary was on the record. Nitin Gadkari criticised the Reserve Bank for not releasing enough money for road projects about 48 hours ago that was on the record. This is not unnamed sources. What I am asking you is that should section 7 have been even threatened to be used? Is that weakening both institutions and particularly the Reserve Bank?
Any legal use of an existing framework cannot in itself be objected to. I do not know for example, what are the bases of the statement that section 7 was threatened to be used. Secondly, it is not very clear to me at what level section 7 can be threatened. There have been disputes between the Reserve Bank and the government before. When Manmohan Singh was the governor of the Reserve Bank and Indira Gandhi was the prime minister there was an occasion. I think Manmohan has written about it where the finance ministry decided to take away from the Reserve Bank the power to grant entry to foreign banks to open branches.
That decision was actually sent to the cabinet and it is the cabinet that actually took those decisions, whereupon Manmohan wrote to Indira Gandhi and said that if this decision is implemented he will resign. Indira Gandhi absolutely reversed the cabinet’s decision. So, this raises an issue.
There have been conflicts before but let who can trigger, what is the process for triggering section 7, is it simply some joint secretary can write off, does it have to be signed off on the file by the finance minister. Secondly, what is the threat? Is the threat that if you don’t do this we will use section 7. I mean there are uncertainties here. And to my mind, we have to know very clearly what actually has happened. At least I have not been very clear when I read the newspapers on this. But maybe because I don’t read the newspapers carefully enough and don’t follow all the tweets, it is my fault.
Let me now move forward to what is expected to happen on December 14 when the Reserve Bank board will meet again and what we are given to understand is that the items that could not be taken up yesterday, the governance of the Reserve Bank of India as well as the liquidity issue will be taken up on the 14th. Now when it comes to governance, I go back again to the fact that the thinking within North Block at this point in time is that the Reserve Bank board should be empowered, that the Reserve Bank board members should be empowered and the RBI should be a board managed institution. In light of what you have seen so far, play itself out and given this thinking what would your expectation be on December 14? What would you not like to see happen?
Once again I am not sure exactly what the intentions of the government on this are. This all are speculations. I would certainly say that the law on this is a little unclear because there is section 7.2 and there is section 7.3 and one of them says that the governor can do everything and the other one says that the board can do anything. So we do need to clarify that.
It should be made very clear what exactly is in the powers of the board. Is it, for example, all kinds of administrative matters? Does it includes technical issues such as what sort of criteria you are going to use for lending, what sort of criteria for financing for strengthening the banks, are capital adequacy issues going to be decided by the board or not. I mean we just need more clarity on this that is all.
Once things are clear people will then we able to judge what is happening. In the world which things are not clear at all I mean every tweet is good enough, so I feel ill-informed on this one quite honestly.
