Reserve Bank of India was established in 1935. Following India’s Independence in 1947 and its subsequent declaration as Republic of India in 1950 the institution was cherished with respect, dignity and integrity with the Governor as its head enjoying vast powers. All the successive governments since Independence never questioned its autonomy or never encroached on its functioning.
Present stalemate between the Government and RBI is regarding the quantum of dividend being annually transferred by the RBI to the Government of India. All Central Banks globally transfer money to their respective governments after setting aside for contingency and development funds, the RBI too is contributing as dividend annually to the Centre. Government of India is now demanding higher quantum of dividend for which the Governor of RBI has voiced his opposition.
It may be a lot easier for the Modi government given its numerical strength in Lok Sabha to have his say in the matter and get the amount of Rs 3.6 lakh crore from the RBI as the Contingency Fund is at the final disposal of the President of India under Article 267 of the Constitution for which a Bill has to be tabled in Parliament and following its approval in both Houses, the President of India will release the funds invoking Section 7 of the RBI Act through a regulator which may be Finance Ministry and not RBI.
Commenting on the present stand-off between the Government of India and RBI, former Governor of RBI Dr Rajan said while addressing an audience at the University of California, for 4 years 2012-2016 India was growing at a faster pace before it was hit by two major successive shocks of Demonetisation and GST which had a serious impact on growth in India at a time when the global economy was picking up. On rising Non Performing Assets of commercial banks, he said the best thing to do in such a situation is to “Clean up”. Dr Rajan lamented there is excessive centralisation of power in political making decision whereby the autonomy of the RBI is impacted.
A similar situation had taken place in Argentina in last century. On the advice of the President of Argentina a billion dollars were transferred from the Central Bank to the Government of Argentina. The move proved to be a major disaster for the economy, foreign investors closed their businesses and quit the country, currency was de-valuated and poor people suffered the most.
It is alleged the Governor Urjit Patel may resign if the Government goes ahead with the proposal of invoking Section 7 of the RBI Act and temper with the money belonging to the people of India. Such a move by the government will spell disaster and the economy will be in chaos. Currency may be devaluated and the wise step boldly taken by the then Finance Minister Dr Manmohan Singh in 1991 of saving the Indian economy by opening to the outside world may take a back seat as foreign investors who have invested in India will wind up their operations.
