[dropcap]I[/dropcap]t is gratifying that the ice has melted in the relations between the Modi government and the Reserve Bank, which had almost reached a point of no return. The thaw happened at meetings held between RBI governor Urjit Patel and Prime Minister Narendra Modi, as well as Union finance minister Arun Jaitley. The two sides are believed to have agreed to retract a little from their former positions. Accordingly, the government has dropped the demand for the transfer of the RBI’s surplus reserves to its coffers, while the central bank will cede to the finance ministry demand that the RBI relax some of stringent lending curbs imposed on banks with toxic assets way beyond acceptable levels. Under the existing arrangement, the Reserve Bank only transfers profits in the form of dividends.
The two sides were on collision course as the RBI implemented a corrective action framework, which clamped down on the ability of the affected banks to disburse credit, which led to a credit squeeze for business and industry to the extent that it started affecting the performance of the economy. There can be nothing more suicidal for a government that is facing one of its toughest election years, with the all-important 2019 General Elections to follow. The problem was particularly acute for customers of non-banking finance companies, which were subjected to the RBI crackdown.
The finance ministry then took the unprecedented step of formally writing to the governor asking for relaxation of the norms to improve liquidity in the interest of the country’s economy. The RBI, on the other hand, took the stand that the government demand could have been necessitated by political considerations and, therefore, it could not oblige the ministry. It is understood that the compromise formula reached by the two sides also envisages the merger of some of the weaker banks so that they can be struck off the RBI radar to re-enable them to resume lending to small- and medium-scale businesses. Similarly, the government is said to be sympathetic to the RBI argument that any decision on the transfer of surplus reserves has to be postponed until the General Elections are over.
It is a face-saving arrangement for both sides. Governor Urjit Patel had, at one point, threatened to resign if the government invoked the provisions of the RBI Act. Similarly, the government and the ruling alliance can heave a sigh of relief that they can go into the elections with one major worry off their head with regard to credit squeeze. It also averts a situation in which the NDA will have to ward off criticism that the Modi government has been mounting assaults on the country’s institutions in pursuance of its autocratic approaches. That would have been a disaster for the ruling alliance.