Why govts want central banks on their side? - Letsdiskuss
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Blogger | Posted 06 Nov, 2018 |

Why govts want central banks on their side?

Preeti Taneja

Entrepreneur | |Updated 08 Nov, 2018

When you outline all the promises BJP made to come to power, they were all shaped around development. It’s a whole different topic though that after the election, their government did all except focus on development—right from picking unnecessary issues to silencing people to trying to create an illusion of economic progress.

Now, as we close general election 2019, things are becoming apparent even to BJP’s staunch supporters who voted the party for the sake of development. GDP has slowed down. People are struggling with unemployment. Farmers are committing suicide. GST has caused enough troubles to SMEs. Demonetization was an economic loot that killed hundred and rid people of their financial freedom. 

And, of course, even those who feel cozy with this narration, everyone knows in secrets that media is not independent in Modi rule. 

rbi-vs-government-letsdiskuss
(Courtesy: HumanJunction)

Now, again, to create an illusion of development, the central government wants to suffocate the premier most independent institute of the country: Reserve Bank of India. Why? It’s fairly simple. 

As Finance Minister, Arun Jaitley has hinted on record multiple times that he and his government wants RBI to decrease the interest rate—the rate at which a bank borrows money from the central bank. And RBI has long been against and calculative with this proposal. 

Interest rate (or repo rate) plays a direct role in influencing the country’s growth and GDP. When the central bank decreases the interest, it makes borrowing much cheaper for other banks of the country. This eventually makes taking loans from the banks cheap for the end consumers. And when that happens, the end consumers usually spend more, which facilitate more money circulation in the economy. This leads the economy to grow. And hence the GDP increases. 

BUT there’s a drawback: this economic growth is only short-term. When there’s more money circulation, inflation increases. This means, when the central bank decreases the interest rate, it ends up increasing the inflation, which, of course, isn’t good. This is why, RBI has been in reluctance to the government’s demand to decrease the interest rate—because it fears economic-wide inflation. 

When the government demands more control of RBI, it’s hard not to imagine that it’s looking to score points here by manipulating the interest rate and boost short-term growth that helps them in the election campaigns. Also, reports suggest, with more control of the central bank, the government wants to grant loans and concessions to the public banks. Even in this case, the liquidity will increase in the market which, although will look good in the GDP rate, will come with the cost of higher inflation. 

Aside from the central government, RBI Board, too, which also includes leading industrialists of the country, are looking to have more say in RBI’s monetary policies. (This has never happened before. The board usually gives broad directions to the RBI. But now it’s looking to flex more muscles.) 

Noteworthy is, the board itself includes few names that are favorites to the governments. In recent months, the government has made some unprecedented and politically charged appointments in the board of Reserve Bank of India—a few of which has a conflict of interests. Here and here are the reports on such appointments.   

So, one can assume that some of these board members are government’s proxies who want to meet the government’s pushy, short-term, politically motivated efforts. Unsurprisingly, the core team at RBI is uncomfortable to have an active board that plays a pivotal role in its policies. 

From supreme country to (allegedly) election commission to now Reserve Bank of India—one institute after another is crumbling to the government’s will. If you still think these are “ache din”, it’s sad to see a section of a country so cynical to see facts.