Finance minister is always superior, RBI governor can’t defy

NEW DELHI: The dynamic between the RBI and the government is one of give and take but if the finance minister insists on a certain course of action, his view will need to prevail, former PM Manmohan Singh has said in his daughter Daman Singh’s book “Strictly Personal: Manmohan and Gursharan”.

Recalling his tenure at the central bank, Singh says, “There is always give and take. I had to take the government into confidence. The governor of the Reserve Bank is not superior to the finance minister. And if the finance minister insists, I don’t see that the governor can refuse, unless he is willing to give up his job.”

Singh’s comments are significant in the context of tensions between the Modi government and RBI governor Urjit Patel amid heated — and contending — commentary on the autonomy of the central bank. Singh opines, after recording a divergent point of view, the governor can insist on directions from the Centre, which would then need to be followed. The book, first published in 2014, includes conversations with the former PM on a range of topics and references to his stewardship of the RBI, and sees Singh explaining how he handled differences with the Indira Gandhi government in 1983, even mentioning his offer to resign over a move to strip the RBI of its power to grant bank licences, which, he felt, eroded the central bank’s autonomy.

Singh speaks of tensions with then finance minister Pranab Mukherjee over the move of London-based Caparo group, in which business magnate Swraj Paul and his family held a majority share, to buy shares of Escorts Group. The UK-based business initiated the purchase of shares even before RBI granted it permission. The RBI informed the government that it intended to reject Caparo’s application.

The book notes the government of the day, however, did not have any misgivings and asked the RBI to grant permission, which it did. The matter went to court and the SC finally held the government’s order to RBI and permission granted by the central bank to be valid.

Asked about the case, Singh says, “Well, it was a situation that brought me in conflict with the government. I have given RBI’s view, but said the government could always overrule it. This was a government scheme… Ultimately, it was resolved by the government giving a directive to RBI.” Singh makes it clear the government would have liked RBI to have acted on its own with regard to the application under a portfolio investment scheme for NRIs. But he said RBI did not act until the explicit approval of Cabinet Committee on Political Affairs was conveyed to the central bank.

In a second case the book refers to, Singh had strong reservations over application of the Bank of Credit and Commerce International to open a couple of branches in India. Permission was almost granted when Charan Singh was PM and finally cleared by the Congress government in 1983.

The government, unhappy with RBI’s power to issue bank licences, sought to take them. “I sent my resignation letter to Pranab Mukherjee and PM. Later, I managed to persuade Mrs Gandhi that the Cabinet decision was not proper… they dropped the idea,” Singh says.

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