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Mainstream, VOL LII No 19; May 3, 2014

Political Overreach by Election Commission / Reserve Bank Governor

Monday 5 May 2014, by Rajindar Sachar

All parties have broadly agreed on various aspects of the model code worked out by the Election Commission for a certain period before the elections. It has worked quite satisfactorily. Fortunately the Election Commission still remains in command. Recently when it denied the Central Government to make certain changes in some economic and subsidy policies (though the latter 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 nationalisation in 1969 though only two licences in the private sector have been allowed, the matter has been made controversial by the RBI deciding to issue two fresh licences. More astonishing is the comment by the Governor, RBI that giving bank licences is not in any way a political process. This plea is unacceptable in political circles because it cannot be forgotten that the economic crisis in 1969 created by the private bank fiasco was avoided that year by the nationalisation of major banks. (Of course there was a political angle in the Indira-Morarji Desai power struggle at that time.) Since then however the Central Government has been formed by different political parties. But sensing the public indignation at allowing the corporate sector to set up banks, no Central Government even remotely broached the idea of change of policy.

It was only in 2011 that the UPA Government, known to be under big corporate sector pressure, announced, though in a low key, a policy for new banks in the Budget for FY 2011-12, but did not dare seriously follow it up. The Reserve Bank Governor, who evidently is a follower of the Chicago School of Economics of unadulte-rated private sector economy, was keen to go ahead with privatisation, but the Ministry of Finance opposed it, even Chidambaram, no doubt also a believer in the Chicago School of Economic Policy (1990), opposed it, realising the political dynamite of privatisation. But the Governor, nevertheless, referred this matter to the Election Commission.

One would have expected an immediate curt negative reply from the Election Commission for the obvious reason that bank nationali-sation is one of the most explosive political decisions, and which only an elected govern-ment is competent to modify. By what logic the Election Commission has permitted the Reserve Bank the liberty to take such a decision independent of the government on such a delicate financial, economic and political policy is beyond comprehension. The 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. The RBI 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 when a new government has taken over. Such a change of policy requires full-fledged debate not only in legislatures but in the political circles. It cannot be done quietly at a bureaucratic level.

The unexplained hurry by the Governor, Reserve Bank to issue two private licences 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 per cent of total deposits and 73 per cent of total credit. If analysed in depth the private banks service their own private clients and have no public purpose. As a matter of fact in the last couple of years even in the USA the biggest banks, like Bank of America were saved from bankruptcy by the US Government lending huge amounts of money to them. A fallacious argument in favour of privati-sation of banks that they are less likely to default and therefore are less of a burden on the public finance has been authori-tatively negatived by the International Mo-netary Fund (IMF) which has warned that the world’s biggest banks still get a total of about 590 billion dollars in subsidies from their governments. In that light this action of giving licence for private banking by the Reserve Bank Governor is mystifying. This decision has already been adversely comm-ented upon by Members of Parliament and they have warned that the RBI should have waited, as a decision had to be made by the new government after the general elections; and they have also cautioned that “they would revisit the issue of new bank licenses”.

Bank nationalisation is a matter of govern-ment policy—the Supreme Court in the Bank Nationalisation Case (1970) specifically refused to consider the argument of private bankers that under the scheme of social control, exercised by the Reserve Bank of India, the commercial banks had achieved impressive results comparing favourably with the performance of the State Bank 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 manage-

ment had set up an impressive and efficient business organisation serving large sectors of industry.

I feel strongly that the Governor, RBI should immediately withdraw the per-mission so as not to create unnecessary lack of confidence and want of rapport between the RBI and new government. Already there is a bias against the public sector—this is clear from the fact none of the major political parties, though at each other’s throat in their election offensive, has even remotely praised the public sector; rather all are promising to encourage the private sector— ironically forgetting the compulsion for socialism highlighted in the Preamble to our Constitution.

The author, a retired Chief Justice of the Delhi High Court, was the Chairperson of the Prime Minister’s high-level Committee on the Status of Muslims and the UN Special Rapporteur on Housing. A former President of the People’s Union for Civil Liberties (PUCL), he is a tireless champion of human rights. He can be contacted at e-mail:

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