Cronyism Is At The Root of Modi Government's War on RBI

TWO years after demonetisation (November 2016) - Modi’s lies have unravelled and been exposed. The RBI has stated that 99.3% of the banned notes returned to the system - so the move did not wipe out black money. The RBI in fact has disclosed that less than four hours before Modi’s announcement of the Note Ban, the RBI Board had told the Government that “Most of the black money is held not in the form of cash but in the form of real sector assets such as gold or real-estate and… this move would not have a material impact on those assets.” The Board had also said that the volume of counterfeited notes was not enough to warrant demonetisation: “while any incidence of counterfeiting is a concern, Rs 400 crore as a percentage of the total quantum of currency in circulation in the country is not very significant.” So - even as the RBI approved the move, it retained a small bit of its autonomy by putting on record the fact that Modi’s excuses for demonetisation did not hold water.

It’s also no secret now that demonetisation real intent was to infuse liquidity in banks by forcing people to part away with their Jan Dhan. This became essential since banks especially Public Sectors Banks (PSBs) were in crisis due to mounting Non-Performing Assets (NPAs). Under Modi rule NPAs have increased 400 percent and have now crossed figure of Rs 10 Lakh Crore. Majority of these NPAs are of big businesses who stood rock solid behind Modi massive election campaign before 2014 election.

Likewise, Modi introduced Goods and Services Tax (GST) at midnight through a special session of parliament it was a ‘second independence’ for the nation. While direct corporate taxes were reduced, people were made to pay indirect GST to please corporations.

GST also in the long run will work to displace small - medium businesses and create ‘market space’ for the big ones. GST and Demonetisation were both nothing but payback by Modi to big businesses for their financial support to him.

It was small and medium businesses who provide a large chunk of employment were worst hit by demonetisation and GST.

Using Jan Dhan To Replace NPAs of Corporates

With NPAs in banks increasing at a rapid level, the infusion of additional capital by the Government and even the dramatic demonetisation decision failed to address the PSBs’ crisis which has a direct bearing on their credit/loan granting capacity.

In the face of mounting NPAs, the Modi Government recapitalised Public Sector Banks (PSBs) to the tune of Rs 2.11 Lakh Crore in last year’s budget. But RBI, fearing that the record level of NPAs and mounting combined losses of PSBs will grow into a full-blown financial crisis, seems to have tightened the screws on banks in its capacity of prime regulator of the banking sector. In February 2018, the RBI issued a circular giving a six-month deadline to large businesses to either pay back their loans or go in for bankruptcy proceedings. This was one of the key triggers for the Government’s attempt to usurp RBI’s autonomy and invoke Section 7 - because the Modi Government wants to protect its corporate cronies and in fact use the precious RBI reserves to bail out those cronies.

Crisis Spreading to NBFC Sector Owned By Big Capital

Recently, as was feared the banking sector crisis spread to the Non - Banking Financial Companies (NBFC) sector also as manifested in IL & FS defaults on payment obligations. The Government, fearing that this news might cause the ‘market’ to panic and precipitate a full-blown financial sector crisis, invoked a rarely-used provision of the Companies Act to take over the management of IL & FS.

Imminent defaults in power sector debts of Adani, Tata, Essar in Gujarat are also out in the open. The Gujarat Government has already come to their rescue and approached the Supreme Court with the request to amend the Power Purchase Agreements (PPAs) and allowing pass through of hike in cost of Coal. Supreme Court has earlier refused to do this because power purchase agreements do not have such a clause. Power Sector debts amounts to a massive Rs 1 trillon and CRISIL has already come out with a statement that 40-60% of hair-cut (financial jargon for write-offs) would be required to address the power sector debt crisis of Adani, Tata and Essar!

Issuing threat of using Section 7 of RBI Act

It’s in this overall backdrop that we must see the Modi Government threat to invoke the never-used provision of Section 7 of the RBI Act, which empowers the Government to instruct RBI to take certain steps in public interest in consultation with the Governor of RBI.

The Government wanted to make RBI to do two specific things: a) Transfer one third of its Reserves of around Rs 9.60 Lakh Crore to Govt and b) open a special liquidity window in the wake of the NBFC crisis. Finance Minister Arun Jaitley tried to argue that the Government wanted to do this in ‘public interest’ to assist small-medium businesses (MSMEs) with their credit/loan requirements, since NBFC has traditionally lend to them.

The reality is the Modi Government is invoking the interests of MSMEs purely as a political cover-up story. The fact is most NBFCs are owned by big capital, big business houses and private financial sector entities unlike the banking sector where PSBs are still a major player. Big capital thus has a direct ownership interest and stake to see that NBFC is bailed out. Even if one argues that part of NBFC credit has been to MSMEs, it was only as part of their business interests and in search of substantial profits, as lending rates are high in NBFC sector for lending to small-medium businesses.

The Govt is pressurising RBI to release additional liquidity as it is fearing that after IL & FS, more defaults can get trigger in NBFC. It is pushing the line of big capital which wants additional loans/credit for protecting themselves now when they are facing crisis in NBFC sector due to reckless lending (like IL&FS funded infrastructure credit with help of short term deposits) in search of quick profits.

‘It’s All For Small Businesses’: Another Lie

MSMEs have been at the receiving end of the Modi Government’s economic decisions for the most part of Modi’s term. Now they are being cited as an excuse for the Government’s attempt to plunder a third of RBI’s reserves!  

The Govt wants RBI reserves with intent to recapitalise banks so that their credit/loaning generating capacity increases (along with fulfilling international requirements of BASEL norms for Capital Adequacy for Banks). The Banks can then in turn lend to and bail out favourite corporates of the Government when they are in deep crisis (like Adani, Essar and Tata in the Power Sector) through ensuring that they get additional credit/loan. Some of this would be used to repay old loans.

Its clear that Govt talks of ‘public interest’ and small businesses are merely a political ploy with election approaching while the real intent in taming RBI is to serve big businesses with the hope that they stand strongly with PM Narendra Modi when it comes to funding elections. This is nothing but taking cronyism to new heights where the regulator is forced to decide liquidity levels based on the interests of a few corporate players! This is not serving ‘public interest’ but corporate interests. Public interests can only be served by taxing the rich and corporates to raise the revenue required for recapitalising banks, and taking stern action to recover loans from wilful corporate defaulters.  

In the last meeting of the RBI Board, RBI stood its ground and staved off the use of Section 7 by the Modi Government.