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The Hindu Notes for 19th November 2018

Balance of power, in the balance

Any attempt by the Centre to override the RBI Governor using the RBI Act would be ill-advised

  • The role of the Board of Directors of the Reserve Bank of India (RBI) and its powers vis-à-vis the RBI Governor have come into focus in the ongoing tussle between the Centre and the central bank. The Centre has hinted that it is examining the option of using the powers of the RBI Board to override the Governor.
  • There are several questions that arise from this unprecedented attempt by the Centre to use powers under the Reserve Bank of India Act, 1934. The most important of these is: Where does the balance of power lie between the Governor and the board? What is the legal position of the board in relation to the Governor? Does the latter draw his powers from the board as in a corporate set-up? Can the board give directions to the Governor on issues of policy and management of the central bank?
  • Before we get to answering these, let’s get this out of the way first. The relationship between the board and the Governor is not comparable to a corporate set-up where the managing director (the corporate equivalent of the Governor) reports to the board and draws his powers from it.
  • While a managing director is an agent of the board in a company, in the RBI, the Governor is not. He draws his powers from the RBI Act and not from the Board of Directors. He is appointed by the Prime Minister in consultation with the Finance Minister. The RBI Board has no say whatsoever in his appointment. In a company, the board of directors chooses one of its own to be appointed as the managing director. In the RBI, the Governor secures board membership only after he is appointed to the post. It is, thus, wrong to compare a corporate board to the RBI’s and suggest that the Governor is subservient to it.

    • Constitution of the board

  • But what is the constitution of the RBI board like? As per the RBI Act, the board is made up of the following members: the Governor and four Deputy Governors, four directors (one each from the four regional boards of the RBI), 10 directors to be nominated by the Centre, and one government official who is also to be nominated by the Centre.
  • The present board is made up of 18 members, which is the Governor and four Deputy Governors, four regional board members and nine nominees from the Centre who include two officials, the Economic Affairs Secretary and the Secretary, Department of Financial Services.
  • So, where does the balance of power lie between the Governor and the board? The sections in the RBI Act dealing with this subject are rather vaguely worded. Eminent past Governors have interpreted Section 7, the relevant one, to mean that the powers of the board and that of the Governor are concurrent. The Governor draws his powers from Section 7(3) of the Act. He can exercise all powers and do all things that may be exercised and done by the RBI.
  • This is subject to a caveat though. The board, under Section 58, can make regulations that will give it the powers to override those of the Governor’s. But this is subject to two important conditions. First, the regulations have to be consistent with the provisions of the RBI Act, which essentially means that the board has to act within the framework of the Act. Second, these regulations have to go through an elaborate approval process before they become law (Section 58(4)). The board has to forward the regulations to the Centre, which will have to table them in both Houses of Parliament. Members have a period of 30 days within which they can either suggest modifications to the regulations or annul them.
  • And then, there is the brahmastra of Section 7(1) which confers powers on the Centre to issue directions to the RBI “from time to time” in the public interest after consultations with the Governor. All bets will be off if this section is invoked as it will become untenable for the Governor to continue in his position.

    • Convention

  • This is the framework of the law but what has been the convention till now? The RBI Board has always functioned in an advisory role with the understanding that the Governor would consider its advice while making policy decisions. In other words, there was mutual respect between the board and the Governor, with both operating in a spirit of accommodation.
  • The fact is that neither Section 7(1) nor Section 7(3) has been unleashed in the 83-year existence of the RBI. Not even when the RBI was privately owned between 1935 and 1949.
  • It is not as if there have not been any disagreements between RBI Governors and governments before this. You only have to read the memoirs of the former Governors, Y.V. Reddy and Duvvuri Subbarao, to understand the extent of meddling by the Centre in the RBI’s affairs. Yet, things did not reach the brink and were sorted out quietly behind the scenes.
  • Another former Governor, C. Rangarajan, has spoken about how the RBI, under Governor R.N. Malhotra, was forced by the Centre to withdraw a circular freeing short-term rates of banks. Yet, there was no chatter of invocation of Section 7 or of the board arming itself with governance powers.
  • What’s the difference between then and now? The short answer is that the spirit of accommodation, which flows out of mutual respect and understanding of each other’s compulsions between the RBI and the Centre, and which was evident then, is absent now. And the blame for this has to be shared by the players involved in the current tussle.
  • It may not be very difficult for the Centre to have its way by using the board’s powers to frame regulations overriding the Governor but this will necessarily come with a price. Such a move will not only set a bad precedent but also lead to several ticklish situations.
  • The RBI Board has several representatives from industry. The present board includes N. Chandrasekaran, Chairman of Tata Sons, Dilip Shanghvi, MD of Sun Pharma, and Manish Sabharwal, founder of Teamlease. There will be a conflict of interest if industrialists are members of committees that run the affairs of the monetary authority of the country (and we are not for a moment suggesting that they will behave in any manner favourable to their interests).
  • Second, there is a good reason why the RBI has been kept at arm’s length from the Centre and bestowed with a certain independence. That is because the Centre is the spender and the RBI is the creator of money, and there has to be a natural separation between the two. The Centre arming itself with powers to run the RBI runs afoul of this precept.
  • Whichever way we look at it, such a move by the Centre would be ill-advised and will take its relations with the monetary authority into uncharted territory. There will be no winners in this dangerous game.
  • Enough dirty linen has been washed in public in the past month and it is time for the Centre and the RBI to behave like the mature entities that they are, uphold time-tested conventions, and act with mutual respect and a spirit of accommodation.
  • The board meeting today, November 19, will set a crucial precedent in the economic history of India, and one can only hope that it will be the right one.

    • Further stressed by thermal power

    The energy sector must be required to report its water consumption

  • The Composite Water Management Index (CWMI) by the NITI Aayog, which was released this June, shows that 600 million people face high to extreme water stress in India. The report, which was published in association with the Ministry of Water Resources, Ministry of Drinking Water and Sanitation and the Ministry of Rural Development, places India at a dismal 120 among 122 countries in the water quality index. It predicts that a persistent water crisis will lead to an eventual 6% loss in the country’s Gross Domestic Product by 2030.
  • A significant key to this stress is the vast gulf — of about 1498 billion cubic metres (BCM) versus 744 BCM — that has been predicted between the demand and supply of fresh water, by 2030. In the projections that the Central Water Commission (CWC) released in 2015, the sector-wise requirement of water (that is, for drinking and domestic use, industry and energy) will rise steeply between 2030 and 2050.
  • This mounting rise in demand is starkly evident in the energy sector, which is key to India’s ambitious developmental plan. The share of water consumed by this sector was 0.62% in 2010, which is pegged to rise up to 1.37% in 2030 and 8.98% in 2050.
  • The CWMI report covers these broad themes — ground water and surface-water restoration; major and medium irrigation; watershed development; participatory irrigation management; on-farm water use; rural and urban water supply; and policy and governance. The projected water demand of the energy sector makes it an important point for the NITI Aayog to consider while bringing out future iterations of the CWMI.

    • Competition inevitable

  • Here are some facts to mull over. As per the Central Electricity Authority (CEA), March 2018, thermal electricity accounts for more than 86% of India’s total power generation. Analysis shows that 77% of India’s total electricity comes from thermal power plants that are dependent on freshwater sources. Of all the freshwater-cooled thermal plants, 38.9% of generation capacity is installed in areas with high or extremely high water-stress. By 2030, more than 70% of India’s existing thermal power utilities are likely to experience an increased level of water competition from agricultural, urban, and other industrial demands.
  • As the power sector consumes more water, competition between power and the other thirsty players is only likely to increase — a factor that future editions of the CWMI will have to consider.
  • The CWMI also raises three main issues related to data: limited coverage, unreliable data and limited coordination and sharing. Measuring water consumption by power plants has been a challenge for long. However, it can easily be tackled by using the existing CEA reporting mechanism for daily generation. To do so, daily water withdrawal and consumption reporting should be mandated. These can be measured with existing technology and added into this reporting framework.
  • Such information will also help in implementation of the Ministry of Environment, Forest and Climate Change Notification (dated December 7, 2015), which mandates specific water consumption norms for existing and new thermal power plants.

    • Seamless sharing

  • In addition, information about water stress, power plant siting (location) and so on must be shared seamlessly across departments — a service that the CWMI could perform. The NITI Aayog alludes to this while describing the CWMI: “This Index is expected to establish a public, national platform providing information on key water indicators across states. This platform will help in monitoring performance, improving transparency, and encouraging competition, thereby boosting the country’s water achievements by fostering the spirit of ‘competitive and cooperative federalism’ among the states. Further, the data can also be used by researchers, entrepreneurs, and policymakers to enable broader ecosystem innovation for water in India.”
  • The CWMI concludes by noting that water-scarce States such as Gujarat, Madhya Pradesh, Andhra Pradesh, Karnataka, Maharashtra and Telangana are leaders in the Index. It notes that this is “likely driven by necessity in the face of looming water shortages”. Factoring in the water-energy nexus linkages, especially the metrics around power plant water withdrawal and consumption, will only help make the Index better and the States better prepared to manage their water and power resources.

    • Britain on the edge

    Whichever direction the country takes from here on Brexit, it will remain deeply divided

  • Over the past week, a 2015 tweet by former British Prime Minister David Cameron has been widely reshared online. “Britain faces a simple and inescapable choice — stability and strong Government with me, or chaos with Ed Miliband,” he wrote on May 4, before the general election. Mr. Cameron won that election decisively, but the rest of his prediction has been looking darkly comic as Britain continues to stumble from one political crisis to another.

    • Many adamant parties

  • Last week, the respite that came after the British Cabinet formally backed a withdrawal agreement reached with European Union (EU) negotiators lasted less than 24 hours, for a series of resignations later and the prospect of a no-confidence vote now threaten to disrupt the deal. Five Ministers are lobbying Prime Minister Theresa May to change the terms of the deal. Ms. May is adamant that she won’t step down. She insists that her deal meets what the people voted for in the referendum and prevents the development of a hard border between the Republic of Ireland and Northern Ireland.
  • Just as determined are the so-called hard Brexiteers such as Jacob Rees-Mogg and Boris Johnson. They are eager to avoid any form of customs alignment with the EU that will dent Britain’s chances of forging trade deals, even if the limits are only temporary. They’ve been lining up an increasing number of Conservative MPs to call for a vote of no confidence in Ms. May, though it is still unclear if and when they will have the sufficient numbers to do so. What worsens the situation is that, thanks to the general election that the government risked last year, it is now dependent on Northern Ireland’s Democratic Unionist Party (DUP) to get anything through Parliament. The DUP is deeply unhappy with the state of affairs, arguing that the graduated customs arrangement being proposed will threaten Britain’s territorial integrity. The Labour Party, while insisting that it is committed to Brexit, wants the government to return to the negotiating table. It dubs the current deal a “huge and damaging failure” which fails to live up to shadow Brexit Secretary Keir Starmer’s six tests to judge the deal.

    • A bumpy road ahead

  • It is incredibly hard to predict where things will go from here. Should Ms. May win a leadership contest, it’s highly likely that her deal would be chucked out of Parliament. Should she be replaced, there’s a good chance that the hard line pursued by any successor would lead to no deal being forged and Britain crashing out of the EU on World Trade Organisation terms. Most rational observers agree that this situation would be disastrous for the country. There’s also the increasing possibility of a second referendum, and the more remote one of a general election (this would require a two-thirds parliamentary majority and would be like Turkeys voting for Christmas for the Conservatives and the DUP). But what is remarkable is that all these scenarios share one thing in common: not one of them commands support from a majority of politicians or has clear support from the public. In a recent Sky Data poll, 55% backed a second referendum and just one in seven backed Ms. May’s deal. This is far from the categorical endorsement that its proponents might have hoped for given the chaotic state of affairs and the very different visions of Brexit being presented to them. Britain remains as divided as ever before — or possibly more so.
  • Many, particularly within the Conservative Party, have been scathing in their assessment of Ms. May for the current deal. The most contentious part of the 585-page document covering everything from Britain’s £39 billion “divorce bill” to the rights and privileges of EU citizens relates to the backstop or insurance policy that will kick in to avoid a hard border in Ireland. Unsurprisingly, Ireland has been adamant on the need for this, but Brexiteers are convinced that it would effectively run the risk of keeping Britain in what one MP described as a “Hotel California Brexit” — one in which Britain would never really leave but remain bound by EU customs rules without having a say in EU policy, as has been the case until now. It’s true that the deal, as it stands, is far from ideal and does not deliver on the “taking back control” message that had been touted through the referendum campaign. But then again, that was always an impossible dream, one of the many lofty promises made by Brexit campaigners alongside the pledge that forging a trade deal with the EU would be the “easiest in history”.
  • The trouble has been that right from the start, the Brexit envisaged could never have matched reality. The idea of Britain untethering itself from Europe and magically floating around the world was never going to happen. This is a world of shifting priorities and this is a country whose supply chains for goods and services sector, which is a major component of the economy, are enmeshed in Europe. The government’s determination to run a hard-line immigration policy that continues to frustrate business and anger potential trade partners makes this vision even more farcical.

    • The language of Empire

  • So determined have Brexiteers been to shout down anyone warning of potential disruption that they’ve remained firmly oblivious of basic realities. Senior economists and business leaders, and even Britain’s own Chancellor of the Exchequer who has warned of negative consequences, have been portrayed as anti-national establishment figures intent on “talking Britain down”. Former Brexit Secretary Dominic Raab rather chillingly admitted that he had been unaware of how reliant British trade was on the crossing between Dover and the French port of Calais. Mr. Johnson dismissed some of the warnings of chaos as “pure millennium bug stuff”, conveniently forgetting that issues had only been avoided in 2000 because of the tens of thousands of hours spent in preparation. Britain is as obsessed with its colonial history as ever — the language of Empire and one-upmanship has also been infused into the national debate. References to Britain being reduced to “colony status” or “vassalage” abound, while newspaper headlines rage indignantly against defeats or gloat over victories notched up against European negotiators.
  • The trouble is that in the hubris, the public had been left with a distorted sense of reality. It’s not surprising that many think it’s fine to leave the EU when they are fed such castles in the air. The idea of an independent trading nation not structured by pesky foreign courts or regulations is pure fantasy in today’s world. An ugly debate around immigration has also taken hold (it’s noteworthy that in her defences of the deal, Ms. May has repeatedly pointed to the end of free movement as if to justify all other compromises). Whichever direction Britain takes from here, society will remain deeply divided. To even begin to move forward, Britain needs a good dose of reality and an honest conversation.

    • Claiming Sabarimala

    Will Kerala society live up to its celebrated progressive credentials by restoring the rights of Malayarayans?

  • An unexpected fallout of the controversy surrounding the entry of women of all age groups into Sabarimala is the ownership rights of the Malayarayan tribal community over the hill shrine. The controversy has also led to arguments about the Brahminisation of at least some temples in Kerala, which some historians believe were either Buddhist shrines or in the control of the avarna castes. The United Malayaraya Mahasabha has now moved the apex court seeking ownership rights over Sabarimala temple. P.K. Sajeev, general secretary of the Aikya Mala Araya Mahasabha and a researcher, claims that the temples in Sabarimala and in adjacent Karimala were in the possession of the Malayarayans until the early 20th century.
  • The first priest there was Karimala Arayan, Mr. Sajeev says, whose name was reportedly embossed on the first of the 18 sacred steps that leads up to the sanctum sanctorum. Ayyappa, according to him, was the son of Malayarayan couple Kandan and Karuthamma. The legend surrounding the 41-day penance that Ayyappa devotees follow is believed to be related to an episode in their life. The 18 steps are a symbol of the 18 hills around Sabarimala. The Thazhamon Madhom, now hereditary chief priests (tantris) at the temple, snatched away the ownership of the temple from the Malayarayans, the community claims. The right to perform honey abhishekam and the ritual of lighting the makaravilakku at Ponnambalamedu too were taken away, they allege.
  • This brings to the fore the argument by historians such as Rajan Gurukkal about the avarna ownership of the temple. Ayyappa, an uncommon name in the Hindu pantheon, could be the tribal chieftain Ayyan or Ayyanar, who might have been worshipped as a deity by the tribal population, they point out. The introduction of savarna rituals and the ban on entry of menstruating women could be a recent phenomenon, as tribal communities do not have any such practice.
  • M.G.S Narayanan and other historians have also written extensively about how ancient Kerala did not have a culture of temples. Most were kavus, or sacred groves, and temples came into being in the 8th or 9th century CE. Archaeological evidence points to the possible presence of a Buddhist culture too, which was gradually appropriated by Hinduism.
  • As the Supreme Court takes up writ petitions against its order allowing women of all age groups to the Sabarimala temple, it might also trigger questions about the rights of those communities pushed to the margins by modernity and by upper castes. Kerala is one of the few States that extends reservation to Dalit priests in temples governed by Devaswom Boards. It remains to be seen whether Kerala society will also stand up to its celebrated progressive credentials by restoring the rights of Malayarayans.