Subverting The Central Bank Prabhat Patnaik

The Modi government’s penchant for subverting institutions has now extended to the Central Bank of the country. Not content with eliminating the Planning Commission; decimating the finest universities in India; crippling the premier public sector unit of the country, the ONGC, by interfering in its decision making; bringing the nationalized banks to grief by nudging them into sanctioning dubious loans; making a mockery of the Central Bureau of Investigation through crony appointments; and destroying the statistical system built up diligently by P.C.Mahalanobis which was the envy of  countries across the world; it has now turned its attention to the Reserve Bank of India.

The Modi government has been trying to cut the RBI down to size for quite some time. When Raghuram Rajan was, for all practical purposes, shown the door, his more accommodative successor not only was not allowed to have a say on the question of demonetization, but was not even allowed to announce the measure, as his responsibility demanded; instead, Modi jumped in to make the announcement after a cabinet meeting hurriedly summoned a few hours earlier for rubber-stamping it. But even accommodativeness has its limits, as became clear when after much procrastination the Reserve Bank of India finally revealed the fact that virtually the entire demonetized cash had returned to the Banking system, thus exposing the utter hollowness of the government’s claim that the measure had crippled the black economy. Besides, the matter does not relate to just one RBI governor; the idea is to bring the institution to its knees.

We should beware of not getting trapped into a false dichotomy here. The World Bank and the IMF have always been demanding that in every country the Central Bank should be made “autonomous”, which basically means that it should be taken out of the jurisdiction of the country concerned and be handed over to Fund-Bank employees, or ex-employees, to run, so that it can fully serve the interests of international finance capital. Such a demand for “autonomy” has always been fiercely resisted by the Left and democratic movement, not only in our country but all over the world, for it amounts to an abridgement of what remains of national sovereignty in order to suit the needs of international finance capital.

But national jurisdiction over the Central Bank does not mean its kow-towing to the dictates of a government that is itself in cahoots with the corporate-financial oligarchy. Social control over the Central Bank in the interests of the people of a nation is not synonymous with government control. Social control should involve parliamentary oversight, and answerability to the people through the setting up of an appropriate institutional structure. The BJP government’s interference with the RBI must not therefore be construed as opposing the Fund-Bank demand for “autonomy”. Both the BJP government and Fund-Bank want the Central Bank basically to serve the interests of the corporate-financial oligarchy, allied to international finance capital. But social control which is the democratic demand is something altogether different; it entails opposing both the Fund-Bank and the Modi government’s interventions. The opposition to Modi’s latest move for clipping the RBI’s wings therefore does not mean supporting the Fund-Bank demand for RBI “autonomy”; it only means opposing the BJP-government’s machinations to undermine an important established institution.

The specific move of interference I am referring to here is the proposal to set up an independent Payments Regulatory Board (PRB), for the regulation of the more recently developed payments system, such as credit and debit cards and other similar instruments, which would be outside the purview of the Reserve Bank of India. This has been recommended by an Inter-Ministerial Committee set up to finalize amendments to the Payment and Settlement Systems Act 2007 under the Chairmanship of the Secretary, Department of Economic Affairs in the Ministry of Finance. The Reserve Bank had a nominee on this committee who has issued a dissenting note. The report of the committee has been placed in the public domain, and the Reserve Bank has revealed the dissenting note through a Press Release.

Settlement instruments like credit and debit cards are essentially a substitute for money: a payment which one could have made by using currency or cheques drawn on one’s bank account is being settled through the use of cards, on the promise that future cash or cheque payment would clear what is owed to the card-issuer; it therefore allows a given amount of what is conventionally defined as money, that is currency and bank deposits, to manage a much larger volume of transactions than would have been possible in the absence of card-use. Therefore it effectively increases, as it were, the supply of money. Indeed there have been suggestions from time to time that because credit and debit cards and other such instruments play the role of money in settling transactions, they should be included in the very definition of money supply, just as there have been suggestions that “trade dues” should also be counted as money: after all when a tight money policy is pursued, trade dues expand to fill the gap, i.e. to act as money. This suggestion has not been accepted, but it only underscores the close relationship between money and these settlement instruments.

Since the Reserve Bank of India is responsible for formulating the monetary policy of the country which includes controlling money supply, taking the regulation of the payments system out of it purview is a serious abridgement of its powers. It is also a potential source of much confusion with the possibility of multiple institutions, all dealing with money or money substitutes, acting at cross purposes. Besides, if there are multiple institutions then it also becomes difficult to pin down the blame for mismanagement on any single one of them. Social control over the monetary management of the economy becomes that much more difficult to exercise if there are multiple agencies tasked with the responsibility for such management.

There is a further consideration here. The payments system creates instruments which, while being money-substitutes, also differ from money in a crucial way. While credit card payments are made to commodity sellers, including even to small shop-keepers, they are not made in the case of wages and salaries. In other words in no country of the world is the commodity labour-power paid through credit cards. Hence as the volume of card payments increases, the net debt of the household sector to the world of business on account of card payments becomes higher at any given moment of time. The regulation of the size of this net debt of the card-holding households relative to the incomes of such households becomes necessary. This is because the banking system, through which such debt is mediated, especially in India where the payments system is bank-dominated, will otherwise become subject to unbearable stress.

If such regulation is not maintained then banks will get saddled with huge non-performing assets which would undermine their viability. And, what is more, any bank failure on this score would mean a loss for non-card-holding poor households with bank deposits owing to the profligacy of the card-holding relatively more affluent households.

Such regulation however will have to be exercised over banks, curbing their over-enthusiasm to give loans to card holders, imposing controls on card limits, calibrating the link of such limits to the  outstanding debt on account of cards etc. The proposed Payments Regulatory Board, if it is to be effective, will therefore need to have jurisdiction over the banking system. But regulating banks is the job of the Reserve Bank of India, so that a separate PRB will either poach into the RBI’s jurisdiction or subject banks to multiple regulations creating much confusion.

Thus whichever way we look at it, the BJP government’s proposal is an absurd one which will subvert the Central Bank’s authority and create much confusion in the monetary management of the economy. Indeed, as the dissenting note by the RBI representative points out, regulation of the payments system by the Central Bank is the dominant international model. The BJP government, by departing from it for no palpable reason other perhaps than a desire to cut the RBI down to size, will only create mayhem. But then that is what this government, with such “achievements” as demonetization and GST to its “credit”, has made a habit of creating.

(This article was originally published in The People’s Democracy on October 28, 2018)