Winning to lose

Venky Vembu | Updated on December 24, 2018

Boardroom battle: The government’s methods in the recent stand-off with the central bank were so cavalierly combative that it has severely depleted its reserves of institutional and public goodwill   -  PTI

Despite the ‘taming’ of the RBI, the government can ill-afford another such Pyrrhic victory

In the annals of ancient Greek historiography, King Pyrrhus of Epirus was considered one of the greatest military commanders of his time who, in his early campaigns against the Romans, notched up overwhelming victories. So addicted became he to the heady fragrance of martial success that when he was not in combat mode, he was overcome by the mercurial restlessness that defined him. He even allowed himself to be persuaded that the big toe of his right foot had divine virtues, which he channelled in healing subjects with a disorder of the spleen.

And yet, for all his loopiness, Pyrrhus was, in the recording of Greek biographer Plutarch, self-aware enough to acknowledge — after a notionally victorious but bruising battle at Asculum — that another such “victory” would be his undoing. That flash of reflective grounded-ness earned him etymological immortality of sorts, and to this day, Pyrrhus’s name is associated with conquests in which the ‘victor’ may have lost more than he gained.

The lie of the land in the wake of last fortnight’s feverishly anticipated ‘boardroom battle’ between the finance ministry and the custodians of the Reserve Bank of India may not be as bloodstained as that faraway Roman war zone, but its dénouement nevertheless represents something of a Pyrrhic victory for the government troops.

The mere ‘cessation of hostilities’ between the government and the RBI after the November 19 board meeting, and even the claim that the meeting’s proceedings were characterised by a measure of cordiality, have been interpreted in some quarters that all is well once more in the arcane monetary world. But in fact, beyond the headlines, on all but a couple of the major points of contention, the government appears to have had its way.

And yet, so cavalierly combative were the government’s methods, and so severely depleted are its reserves of institutional and public goodwill after its perceived ‘taming’ of the RBI, that it can perhaps ill-afford another such ‘victory’.

Indicatively, the RBI has optically yielded ground on some of the critical determinants of its functional autonomy. It has, for instance, had to concede to the establishment of a committee that will determine the optimal size of its reserves, which the government has been eyeing. Given that from all accounts the committee may be packed decisively with government nominees, it bodes ill for the sense of agency that the bank has over the appropriate level and use of its reserves.

Even on matters that are, at their core, central bank functions — such as the amount of liquidity in the system and the restrictive lending norms in respect of banks that are overstretched — the RBI has yielded territory, evidently under duress after the government’s stated intention to invoke a section of the RBI Act under which it could establish its authority over the bank.

The responsibility for sustaining the flow of credit to industry is a delicate balance between lending too little and too much. Governments sensitive to political pressure from a slowing economy will look to keep the taps open; central banks’ mandate is to infuse prudence in lending. Tinkering with the balance and forcing the RBI’s hand, as the government is seen to have done, amount to an erosion of central bank authority that will extract a debilitating long-term price — of the sorts that Pyrrhus belatedly realised.

The tug-of-war between the central bank and the government is not a new phenomenon. Whenever former RBI Governor YV Reddy was asked just how “independent” the central bank was, he would respond that it was “totally free within the limits set by the government”. Both he and his successor Duvvuri Subbarao experienced the limits of that freedom, which the respective governments of the day set.

In any case, tensions between central banks and governments are not peculiar to India. In Europe, for instance, German finance minister Wolfgang Schäeuble was given to publicly hyperventilating against what he saw as the European Central Bank’s perceived policy failings.

And across the Atlantic, Alan Greenspan, the long-serving former chairman of the US Federal Reserve, noted in his autobiography The Age of Turbulence that President George HW Bush, too, was given to public articulations of a lack of faith in the Fed’s hawkish interest-rate policy. Even there, it got embarrassingly personal when Bush Sr seemed to pin the blame for his failure to win a second term on Greenspan. More outrageously, during the Republican primary nominative process ahead of the 2012 Presidential elections, candidate Rick Perry characterised Fed Chairman Ben Bernanke’s “money-printing” as borderline treasonous. Yet, for all such instances of political badgering, governments overseas have been compelled to acknowledge the autonomy of central banks. Former German Chancellor Gerhard Schroeder famously said: “I am often frustrated by the Bundesbank. But thank God it exists!” In India, however, it may already be too late for a sense of divine thanksgiving to dawn on political leaders looking to encroach on central bank turf.

Venky Vembu   -  BUSINESS LINE


Venky Vembu is Associate Editor, BusinessLine;


Published on November 30, 2018

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor