A K Bhattacharya: Politically correct

RAISINA HILL

angle that prompted the government to intervene in the interest rates matter.

Last Thursday, it seemed the usually supine bureaucrats at the Centre acquired some spine. One of them sent a letter to a few public sector bank chairmen to get their boards to ratify their decision to hike interest rates and, until they do so, keep in abeyance any such decision already taken.

It was a rare letter. Rare, because bureaucrats are not known for sending official letters to advise public sector undertakings on how to take their business decisions. Such directives are usually issued over the telephone or at a meeting. This is done to maintain the facade of public sector autonomy and an impression that bureaucrats in Delhi are not interfering in the way a public sector manager is running his business.

So, why would a joint secretary in the finance ministry write an official letter to advise banks to take a second look at their decision on hiking interest rates? Why couldn't the same directive be conveyed over the phone as has been done on so many occasions in the past? There are many reasons and it would be interesting to visit some of them.

One, no bureaucrat could have written such a letter to bank chairmen unless it had the blessings of his political bosses. Not surprisingly, the finance minister clarified a day after the news about this letter broke that the government was within its rights as a shareholder to advise banks to revisit the interest rate issue. What was being done orally over the years had now been done through an official letter. So, what has changed and why should there be any hue and cry?

In fact the decision to send out a letter is quite significant. The finance ministry, it seems, had a specific game plan while sending out that letter. Mind you, finance ministry bureaucrats made no secret of the fact that a letter advising a rethink on interest rates had been sent to the bank chairmen. Normally, finance ministry bureaucrats do not open their mouth on any such move they initiate. The finance minister has a tight grip on them and it is reasonable to assume that they would not have talked about the letter unless they had been given the green signal on this.

The point is that there was a clear purpose in letting out the fact that the finance ministry has opposed the idea of an interest rate hike. And this purpose is influenced by the United Progressive Alliance (UPA) government's political agenda of not letting interest rates go up and affecting the feel-good factor in the economy. Don't forget that the national common minimum programme of the UPA is committed to reining in inflation and keeping the cost of housing loans under check.

Inflation has been reasonably controlled by not letting retail petroleum product prices fully reflect the rise in international crude oil prices. And now, housing loans were becoming costlier with rising interest rates. So, it was necessary for the UPA government to step in and to be seen by everyone to have intervened and have at least tried to place brakes on the northward movement of interest rates. Even if the banks are eventually allowed to raise the rates, an impression has already been created that the "aam admi" government had tried to roll back the interest rates.

The realisation of how a hardening interest rate regime in the mid-1990's spoilt the growth prospects must have also dawned on the leaders at the helm of economic policy making in UPA. Manmohan Singh, P Chidambaram and Montek Singh Ahluwalia were all around then and saw how rising interest rates choked the growth engine. Today, it seems they do not want that history to be repeated. In any case, the inflation monster has been kept on leash, though artificially. So, why allow interest rates to rise and spoil the party?

Finally, don't forget that by advising banks to rethink on interest rates, the Manmohan-Chidambaram duo is once again bringing to light the problems the Left has created by stalling banking sector reforms. A bill to reduce government equity in public sector banks to 33 per cent was moved by the NDA government. There is no hope of such a bill being revived now. Even on increasing the voting rights of shareholders in private banks, there is considerable debate and the Left parties are yet to give their nod of approval. If the government's stake in these banks had declined to 33 per cent, as was envisaged, today there would have been no such controversy.

What happened last week is, therefore, symptomatic of the larger problem the Indian banking sector faces because of the government's failure to push through reforms. So, before you complain against the ministry's attempt to undermine the public sector banks' autonomy, recognise that this is a government that is paying the price for not having speeded up on reforms and on reducing its stake in public sector banks.