Governor Raghuram Rajan’s August 4 monetary policy review wore the unmistakable signs of excellence we are used to, but it is overshadowed by the antics of the finance ministry.

The Financial Sector Legislative Reforms Commission (FSLRC) submitted its report at the end of March 2013 along with a draft Indian Financial Code (IFC 1), to replace all existing financial sector legislation.

Thereafter, the finance ministry set up various task forces to deal with various segments of the report. Suddenly, on July 23, 2015, the ministry released a revised Draft Code (IFC 1MB) calling for comments by August 8, 2015. IFC 1MB significantly varies from IFC 1 and this generated a spontaneous outcry from a large number of eminent persons.

Damage containment

Minister of State for Finance Jayant Sinha, with commendable alacrity, gave an assurance that the Reserve Bank of India’s autonomy in framing monetary policy would not be eroded and any decisions would be taken after due deliberation at the highest level. He emphasised that the FSLRC report was not government’s report. He further clarified that the IFC is a recommendation of the FSLRC. Since the FSLRC completed its work in March 2013, the revised Code of July 2015 cannot be attributed to it, and is squarely the government’s responsibility.

The Union Budget of February 2015 carried legislative changes in the Finance Bill curbing the RBI’s role and setting up a debt management agency. Legislative changes cannot be part of the Finance Bill and were quickly withdrawn.

With the FSLRC being non-existent and the government virtually disowning the IFC 1MB, the revised Code is an orphaned child.

As IFC 1MB is radically differently from IFC 1, there are only two choices: either the government accepts ownership of IFC IMB or IFC 1MB is withdrawn by the government. If neither is done, it only means goblins are holding sway in the ministry.

Legislative amendments

The standard procedure is that when an Act is amended, specific clauses, and objects and reasons for amending are set out in detail.

The ministry should put out a detailed comparative analysis of IFC 1 and IFC 1MB. The government cannot carry this forward without its stance on the contentious issues being transparently revealed. Only then can there be public debate.

The present approach is perfunctory. On the last page of both IFC 1 and IFC 1MB there is a list of existing laws that are to be abrogated. The work here is slipshod as the two lists carry obvious errors.

For instance in IFC 1, on page 189, it says the enactment relating to the nationalisation of 14 banks in 1970 is to be abrogated while the one relating to the six banks nationalised in 1980 is not so listed. IFC 1MB (page 188) states that both the nationalisation Acts of 1970 and 1980 are to be abrogated while the State Bank of India Act and the Associate Banks Act are not listed for abrogation.

Before proceeding any further, the issue of abrogation of the listed Acts should be transparently endorsed by the government. I just cannot see the present government agreeing to the abrogation of the legislation relating to public sector banks. The government may be unwilling to abrogate many other Acts. With the absence of a total and explicit announcement of such abrogation by the government, IFC 1MB just falls apart. It is time the government excoriated the goblins from the finance ministry.

So far, two model compositions have been under consideration. First, according to the FSLRC model, there would be two RBI executives and five external members with a veto power for the governor. Secondly, according to the Urjit Patel report, there would be three RBI executives and two external members, but no provision for a veto by the governor.

Upping the ante

The IFC 1MB ups the ante by a mischievous alternation of the composition of the MPC wherein there would be three RBI executives and four external members appointed by the government but no veto for the governor.

IFC 1MB has triggered a spate of comments from eminent people in the financial sector. C Rangarajan, doyen of the financial sector, has succinctly summed up the matter by saying that if the RBI executives are in a minority the veto should remain, but if the RBI executives are in a majority there would be no need for veto power.

Critics would argue that all the RBI executives would automatically vote with the governor. These critics have no clue how the RBI functions. For instance, during Rangarajan’s governorship, dissent by deputies was not only allowed but encouraged. So much so that Rangarajan would tell the finance minister when a deputy did not agree with him and he would ask the minister to give the deputy a hearing.

It is not for nothing that the RBI is acknowledged world over as a model central bank. The government would do well to appreciate its rich traditions and not be swayed by greenhorns without any central banking experience or knowledge.

In the last few days there have been startling revelations. While the government initially tried to pass off IFC 1MB as the doing of the FSLRC, the chairman of the Commission has said the changes were at the behest of the government. Now that there has been a spate of criticism of the IFC 1MB, the government is using the lame excuse that this version is a ‘peoples document’.

The government must cut its losses and put IFC 1MB into the deep freeze. It should, however, continue with legislative reforms, but in the first instance consider strengthening existing laws rather than abrogating them.

The iconoclastic manner in which IFC 1MB goes about is reminiscent the struggle between the king and the church in British medieval history, epitomised in TS Eliot’s verse-play, Murder in the Cathedral .

The writer is a Mumbai-based economist