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India: Political Over Reach By Election Commission - Reserve Bank Governor

by Rajindar Sachar, 18 April 2014

print version of this article print version - 18 April 2014

All parties have broadly agreed on various aspects of Model code worked out by Election Commission for a certain period before the elections – It has worked quite satisfactorily. Fortunately the Election Commission still remains in command. Recently it denied the central government to make certain changes in some economic and subsidy policies (though the later would adversely affect the poorer sections of society) its neutrality was not challenged. It has therefore come as a shock to many of us that since Bank Nationalization in 1969 though only two licenses in Private sector have been allowed, the matter has been made controversial by R.B.I. by deciding to issue two fresh licenses. More astonishing is the comment by Governor, RBI that giving bank licenses is not in any way a political process. This plea is unacceptable in political circles because it can not be forgotten that the economic crisis in 1969 created by Private Bank fiasco was avoided in 1969 by Nationalization of Major Banks. (Of course there was political angle in Indira – Morarji Desai power struggle at that time.) Since then however Central government with even different political Parties formation has taken place. But sensing the public indignation at allowing corporate sector to set up Banks, no central government seriously even remotely broached the idea of change of policy.

It was only is 2011, that UPA Government, known to be under Big corporate sector pressure, announced, though in low key, a policy for new banks in the budget for F.Y. 20011, but did not dare seriously follow it up. Reserve Bank Governor, who evidently is a follower of Chicago school of economics of unadulterated private sector economy, was keen to go ahead with privatization, but the Ministry of Finance opposed it, even Mr. Chidambaram, no doubt also a believer in Chicago School of Economic policy (1990) opposed it, realizing the political dynamite of privatization. But the Governor nevertheless referred this matter to the Election Commission. One would have expected a immediate curt negative from the Election Commission for the obvious reason that Banks Nationalization is one of the most explosive political decision, and which only an elected government is competent to modify. By what logic Election Commission has permitted the Reserve Bank the liberty to take decision independent of the government on such a delicate financial, economic and a political policy is beyond comprehension. Governor Reserve bank has ventured the unacceptable proposition that granting bank business is not in any way a political process. This stand is totally unacceptable both in principle and in law. R.B.I. can only move in after the central government has taken a political decision to allow private banking – and this decision, if at all can only be taken after the elections and new government has taken over. Such a change of policy requires full fledged debate not only in legislatures but in the political circles. It can not be done quietly at a bureaucratic level.

The unexplained hurry by Governor Reserve Bank to issue two private Licenses defies logic. It is not as if service by private Banks is helping the needy ones. Statistics show that 27 State run banks account for 75% of total deposits and 73% of total credit. If analyzed in depth the private Banks service its own private client and have no public purpose. As a matter of fact in last couple of years even in U.A.S. biggest banks like Bank of America were saved from bankruptcy by the U.S. Government lending huge amounts of money to them.

A fallacious argument in favour of privatization of banks that they are less likely to default and therefore are a less burden on the public finance has been authoritatively negatived by international Monetary fund (I.M.F.) which has warned that the worlds biggest banks still get a total of about 590 Billion Dollars in subsidies from their governments. In that light this action of giving license for Private Banking by Reserve Bank Governor is mystifying. This decision has already been adversity commented by Members of Parliament and they have warned that R.B.I. should have waited, as decision had to be made by the new government after general elections and they have warned that “they would revisit the issue of new bank licenses”.

Bank Nationalization is a matter of government policy – the Supreme Court in Bank Nationalization case (1970) specifically refused to consider the argument of private bankers that under the scheme of social control exercised by Reserve Bank of India, the commercial Banks had achieved impressive results comparing favorably with the performance of Stante Banks of India. The Supreme Court said thus;

“This Court is not the forum in which these conflicting claims may be debated. Whether there is a genuine need for banking facility in the rural sector………..whether administration by the Government of the commercial banking sector will not prove beneficial to the community and will lead to rigidity in the administration, whether the Government administration will eschew the profit-motive, and even if it be eschewed, there will accrue substantial benefits to the public……….and whether the policy followed by the Government in office or the policy propounded by its opponents may reasonably attain the national objectives are matters which have little relevance in determining the legality of the measure. It is again not for this Court to consider the relative merits of the different political theories or economic policies………….This Court has the power to strike down a law on the ground of want of authority, but the Court will not sit in appeal over the policy of the parliament in enacting a law. The Court cannot find fault with the Act merely on the ground that it is inadvisable to take over the undertaking of banks which, it is said by the petitioner, by thrift and efficient management had set up an impressive and efficient business organization serving large sectors of industry.”

I feel strongly that Governor, R.B.I. should immediately withdraw the permission so as not to create unnecessary lack of confidence and want of rapport between R.B.I. and the new government. Already there is a bias against public sector – this is clear from the fact none of major political parties though at each others throat in their election offensive has even remotely praised public sector; rather all are promising to encourage private sector – ironically forgetting compulsion for socialism high lighted in the preamble to our Constitution.

Rajindar Sachar

New Delhi