 Hello and welcome to NewsClick. We are going to discuss what could be called the third major institutional crisis. This government has invoked or shall we say encouraged whichever we want to talk about it. And we have Paranjaya Guhatakuta with us, senior columnist, journalist. Paranjaya, we have a three separate major institutions which have come under attack. One is the Supreme Court where the judges who were selected were not appointed for a fairly long period. There is a standoff between the Supreme Court and the government, finally accepting whatever the Supreme Court had put forward. The second was the CBI. We have the standoff between the director, the special director, both being sent off at a midnight meeting shall we say. Has NewsClick's guests had anticipated? Has NewsClick's guests had anticipated. As your interview with joint secretary, former joint director Shantudu Sen had said. This is the third one where we have the Reserve Bank of India. We have the deputy governor of the Reserve Bank of India publicly disagreeing with the payment regulator being outside the purview of RBI. And now we have other issues that have come up. One was the Guru Murthy who was appointed as one of the directors, external directors of RBI talking about relaxing the loans for the small and medium scale sector by the banks. There are now leaks coming out from the RBI. How do you see this institutional crisis that this government has again seemed to have brought on itself? This government over the last four and a half years has systematically been undermining many institutions. That is not just the judiciary. It's not just the central bureau of investigation. You could argue that whether it be the military, whether it be the bureaucracy, whether it be the election commission of India, whether it be the central vigilance commission, whether the media. All these institutions, formal and not so formal, have been sought to be undermined by the present regime, the ruling regime, the dispensation that we have in Delhi. But to come to the more specific issue of the Reserve Bank of India, the country's central bank and APEC's monetary authority. Now, in the past, a number of governors of the Reserve Bank of India have had their disagreements with the Ministry of Finance and specifically the Finance Minister. Whether it be Dr. Y.B. Reddy, whether it be Mr. Subbar Rao, whether it be Raghuram Rajan, all these governors have had their share of disagreements. And over a period of time, these have entered the public domain. But wait, what's the difference? When you have disagreements on monetary policy, what should be the interest rate, how you should go in for what is called inflation targeting, there was greater dignity in the way these differences surfaced. Unfortunately, in this instance, we see the spat out in the open and in quite an unseemly and undignified manner. It seems that when the Reserve Bank of India's Deputy Governor, Viral Acharya, made the statements that he did, he certainly raised the ire of North Block. And almost like a tutu meh meh tit for tat, Mr. Jaitley came out with a very, very strong statement. As we are talking, the Ministry of Finance is trying to sort of damage control and issued a statement which would appear conciliatory. Now let's come specifically to the issues at stake. There are many issues on which the Reserve Bank of India and the government has not gone along with each other, including the financial regulator, the financial services regulator, whether they should be independent of the Reserve Bank of India or not. And the Reserve Bank has been very clear, no, it should be very much a part of the Reserve Bank of India system. But let's look at the three specific areas where if media reports are to be believed, the process under Section 7 of the Reserve Bank of India Act has begun. Now Section 7 has never been used. If you read the fine print of Section 7 of the Reserve Bank of India, it suggests that in the public interest, the central government can issue certain directions to the Reserve Bank of India. Now once again, whether these directions have been issued in consultation or not, and the whole issue is always public interest. But because Section 7 has never been invoked in the history of this country, the interpretation that has been given that this is an attempt to encroach on the independence and the autonomy of the Reserve Bank of India. And one more minute, and Viral Acharya's public speech, where he recalls what happened in Argentina in 2010, when Argentina's central bank, I mean the head of the central bank of Argentina resigned and it was Cristina Fernández's government and that was a huge kind of furor about it and it resulted in the Argentinian currency tanking and the economy getting into a tailspin. So the very fact that he should invoke what happened eight years ago and saying that if the government doesn't respect the independence and the autonomy of the regulator, then there will be a backlash from the markets. Now when you talk about the Section 7 and it has never been invoked, then the element of this is not that the central government cannot suggest various things to the Reserve Bank. What it means in this case that it will be mandatory on the Reserve Bank to accept the directions if it is issued under Section 7. Absolutely. Of course, every government will say it's in public interest. This I would suggest is akin to the emergency powers that the government exercised in 1975. These are the civil authorities of the country that there is a sense of emergency. Therefore, ABCD consequences have to follow. For monetary policy for the government to give a direction to the central bank essentially means... Like a dictate. Like a dictate. Correct. It has to be obeyed. And especially when it relates to an issue with which the Ministry of Finance or the Minister of Finance is not in agreement with the governor of the Reserve Bank of India and the Reserve Bank of India itself. Now let me bring out what I believe are the three key issues. I think it started with the whole issue of whether these three power projects which are in Gujarat, one which has been set up by the Adani group, the other by the Tata group and the third by the SR group, which are in a bad shape. Now it's a long story. We've already discussed it. But the main point is the independent power producers sought to seek the intervention of the court. Then what happened? After that it went up to the Supreme Court and the Supreme Court asked the Cabinet Secretary to resolve these assets. Because what was the logic? If the deadline of the Reserve Bank of India is not extended, these assets go out of the control of the original promoters as well as the banks. And it could lead to major, quote-unquote, haircuts or loss for the banks. Now, two meetings which were held by the Cabinet Secretary, the representative of the Reserve Bank of India, did not show up. This clearly meant or the signal that went to the government was that the Reserve Bank of India was not going to back off or back down from its sticking to the deadline, which said that even if your assets become non-performing, they become financially stressed, you have no choice. But under the insolvency and bankruptcy code, refer it to the National Company Law Tribunal. This was the first point of friction from what I understand. Softening of the Reserve Bank stand on these three major power producers of which Adani is, of course, known to be very close to this government. So this is one issue that you were saying. The second issue pertains to the issue on which the Argentinian governor, the central bank governor had to quit. How much money should the Reserve Bank of India pay to the exchequer by way of dividends? You know, that's an interesting issue because this government has received higher dividend from the Reserve Bank than in most years of the UPA, except for one year because of demonetization. Correct. As a result of which the same Dr. Urjit Patel, who supported demonetization and with the Reserve Bank of India, had to spend a lot of money as a consequence, whether it be the new currency notes that were printed, the recalibration of the automatic teller machines. But the short point is the Reserve Bank of India did not give the kind of dividend it had in the past. Except for that one year, otherwise it has given more. That's right. So this would have an impact on the government's finances and the fiscal deficit, and this is clearly not being appreciated by North Block and Mr. Arun Jaitley, the finance minister. Well, let me put it differently, that this is an attempt, since elections are coming here, to bail out the government by drawing down on RBI reserves, and we are hearing figures like 3.7 lakh crore rupees. We could be wrong on this because these are all speculations. But huge amounts being asked off in terms of drawing down the reserves, and the reserves are again not public knowledge but about 9 lakh crores, it is said. So very significant drop in reserves in order to finance the deficit of the government. These are very contentious issues. There are some figures which are in the public domain. Now you had to draw down your reserves to keep the value of the Indian rupee vis-à-vis the US dollar from plummeting further. As a result of which it's drawn down, it's foreign exchange reserves. What the other reserves are, we can speculate on it. But what is significant is that what the Reserve Bank of India, the same Dr. Urjit Putel who was perceived to be completely with the government, is also showing a certain amount of spine. Saying that, look, you the government of India should not be telling us how much we should be giving you by way of dividends, that this should, that once you start directing, that becomes an encroachment of the autonomy. And then let me give you the third reason for the friction between the RBI and the Ministry of Finance. And this pertains to the relaxation of norms for the medium and small sector, small industries, small and medium enterprises as they are called. MSME, small and medium enterprises. Now it is very clear that there's been a lot of pressure on the Reserve Bank of India to relax these norms and these have come from the newly appointed director, external director, Mr. Swaminathan Gurumurthy, chartered accountant, editor of Thoglak Magazine and a co-convener of the Swadeshi Jagran Munch. Now it's not a secret that Mr. Gurumurthy was opposed to Dr. Raghuram Rajan. He has publicly said so. He was opposed to all so-called foreign educated economists and it is believed and I have written about the subject that he was among the people who did indeed support, not just support, suggested demonetization. Now there's general consensus that demonetization was a huge disaster and even Mr. Gurumurthy subsequently has kind of waffled, has sort of changed his position but he who's otherwise quite a reticent individual, he actually came out in the public, gave television interviews saying that demonetization is a good way of cleaning up the system, reducing black money. Now he's been a great advocate of the Mudra scheme and he believes rightly or wrongly that one of the reasons this government has not been able to create jobs as it had promised is because small and medium enterprises are not doing well. Now from the Reserve Bank's point of view to dilute its lending norm specifically for small enterprises would also mean making the system, the entire financial system even more vulnerable. When your non-performing assets of the banking sector has gone up above 10 lakh crores when you have a systemically important non-banking financial company like the ILNFS, the Infrastructure Leasing and Financial Services Group, in a mess and all of this is resulting in a so-called cash crunch. Now that's bad news and you're right, elections are six months away. So therefore growth is obviously an issue for the Indian economy. Jobs not only not growing, we have actually probably a shrinkage of jobs in the manufacturing sector. We have of course numbers in terms of the prominent fund, employees insurance etc. And the way ONGC, Oil and Natural Gas Corporation, Life Insurance Corporation have been, their funds are being used. Absolutely, in fact that's the other thing that we have carried. Yes I know. That both life insurance as well as ONGC's surplus has been taken away. Now life insurance is of course savings of the people, prominent fund also. A lot of the employees' prominent fund is invested in life insurance. And especially the proposal that LIC uses money to bail out ILNFS. Yes. With a lot of opposition. It could mean a huge amount of money being transferred from LIC to these coffers but at the end of it, this is to try and actually do what is called pump priming of a splattering Indian economy. In the run up to the elections. In the run up to the elections. With also the falling of the falling rupee, you have a oil price rise. Yes. And you have inflation on the rise because the oil prices are going up. All of this in the run up to the elections is bad news for the Modi government. And that's why the need to siphon off reserves from ONGC, LIC and other government. And this government which has never particularly respected institutions is going ahead and doing exactly the same thing. And this spat is in the open. The only point I just need to underline that so far a process has been invoked under section 7 of the RBI Act. The act itself has not been invoked. And hypothetically, if the act is invoked, what does it mean? Will then the governor of the Reserve Bank of India resign? Will Dr. Urjit Patel put in his papers? Personally, I have a feeling that the government has realized that all this tutu meh meh fighting and this may not happen because it would not only show the government in very poor light it would have also a devastating effect on the economy. So I have a feeling that they may just back off. But I might be proved wrong, I can't say. Yes, you can never fault this government, shall we say, for not falling flat on its face. De-monetization being the classic example. And of course the recent CBI spat. You know, it would be very difficult. And with the Supreme Court now today saying give all the details about the Rafael deal. It's also very, I think it would be very difficult for Urjit Patel, governor of RBI not to put in his papers if he is directed like this, considering this is never happened. So I think it would really leave very little leeway for him to act then because under the institutional setup, the constitutional setup the Reserve Bank Section 7 seems to be mandatory if it is invoked. Unless of course private good is challenged in the courts. In which case there could be some argument but it seems very difficult. If the statement issued by the Ministry of Finance today is any indication which says that look we're not going to discuss what happens in internal meetings but we disclose the decisions. I think maybe the government has realized that things may have gone a little too far. Let's hope good sense dawns on this government. Maybe that's to form the hope. This is all the time we have for news click today. Thanks for watching news click and we'll come to you with more installments of these stories.