Crisis, it is said, often helps warring parties smoke the peace pipe. There may be some debate over whether the Indian economy is already in the middle of a crisis or is merely experiencing early signs of it. But there is already some evidence that the turf battle between the government and regulators has given way to some sort of conciliation.
Consider the following. Finance Minister Pranab Mukherjee declined to utter a word on his meeting with the Reserve Bank of India (RBI) governor last week. His explanation : the finance minister should not be making any statement on his consultation with the governor a few days before the scheduled review of the monetary policy. The RBI governor, too, displayed similar discretion when journalists asked him about his meeting with the finance minister.
In a different way, such understanding between the monetary policy authority and the fiscal policy authority was completely missing until even a few months ago. Of course, there was no act of indiscretion either by the finance minister or the RBI governor but statements made by senior officials in the finance ministry on what the central bank ought to be doing on interest rates would often cause avoidable ripples. On its part, the central bank would also let its discomfort over rising government borrowing be made public through its reports. Healthy tension between the central bank and the finance ministry is not an unhealthy development, as long as the top leadership in the two institutions knew how to use that tension to work out the right policy options for the economy. Whether the leadership made optimal use of that tension, however, was a moot point then.
The problem had its root in the role the central bank should play as a regulator. Should it be seen as any other regulator in the financial sector? Or should it enjoy a special position because it was also the monetary policy authority, in addition to being the regulator for banks?
The finance ministry under Pranab Mukherjee had mooted the idea of setting up a financial stability and development council to oversee the co-ordination among financial sector regulators and taking an overall view on what needed to be done to strengthen financial systems. The central bank, for good reasons, saw in that move an attempt by North Block to undermine its special status among all financial sector regulators.
While the finance minister made a Budget announcement on the formation of the Council, the central bank also made known its reservations about the proposed structure in which the RBI governor was equated with other financial sector regulators. After several rounds of tense consultation, a compromise formula was used to defuse the tension. From what it appeared, the central bank was not entirely satisfied, but it at least was assured of special status during consultations at the Council.
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The finance ministry’s relations with the central bank were strained for another reason. When the capital market watchdog, Securities and Exchange Board of India, quarrelled with the Insurance Regulatory and Development Authority over who should regulate unit-linked insurance plans, the finance ministry had to intervene to resolve the dispute. As a way out, the finance ministry mooted setting up a new body to co-ordinate among the various financial sector regulators including the central bank. Once again, the move upset RBI as it was clearly being equated with all other financial sector regulators.
Indeed, about six months ago, turf battle among regulators in the financial sector was a big issue. Finance ministry bureaucrats, too, would be worried over what needed to be done to resolve it. Today, the situation has changed. Nobody – either in the finance ministry or the central bank – is concerned about regulatory jurisdiction. Bureaucrats have one explanation: when the house is on fire, you don’t worry about which part of it is yours. The more important thing is to save the house from being devastated by the fire, a senior government official explains.
So, if you do notice the absence of tension between North Block and Mint Road, it is not because the problems have disappeared or the two have found a solution. The economic crisis – rising prices and falling growth rates – has taken a toll of both the central bank and the finance ministry. For the time being, all attention is focused on the challenges. But make no mistake, the truce is temporary, because the real issues that gave rise to the troubles six months ago have not yet been fully resolved.