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Why is RBI governor cautious in issuing new bank licences?

March 11, 2014 10:38 IST

Despite the process for issuance of bank licences is on for the past one year, RBI governor Raghuram Rajan wants to ensure there is no violation of the model code of conduct, which came into effect on March 5. By doing so, Rajan is trying to play safe by seeking  the Election Commission's prior approval of what he intends to do, says AK Bhattacharya.

The Reserve Bank of India (RBI) Governor, Raghuram Rajan, has said that he would be able to issue new bank licences in the next few weeks after getting the go-ahead from the Election Commission.  

RBI governor Raghuram Rajan says, he will issue new bank licences in few weeksThis, he has argued, is necessary because the model code of conduct has now been enforced by the Election Commission.  

Is the RBI governor being overcautious or is he simply trying to be correct? This is now being discussed and debated among government officials.  

What has fuelled this debate is what Finance Minister P Chidambaram had said on this issue on Wednesday, soon after the Election Commission announced the schedule for the 2014 general elections.  

The finance minister, according to newspaper reports, had said the model code of conduct would not affect the issuance of new bank licences, and the implementation of decisions already announced would go on uninterrupted.  

The finance minister even said the Union Cabinet and the Foreign Investment Promotion Board would continue to meet and take investment decisions.  

Somewhat endorsing this line of thinking, a senior official of the Election Commission explained that decisions that flowed out of a policy announcement made earlier should not be frowned on by the Commission.

Indeed, the proposal for new bank licences was mooted in a Budget speech a couple of a years ago and RBI has been working on it for quite some time. So, why is the RBI governor saying "we have to seek the formal approval from the Election Commission that announcing the bank licences will be okay"?  

The explanation for what appears to be an overcautious approach could be found in what the Election Commission has stated in its model code of conduct.  

Responding to a specific question on whether a scheme, which has been sanctioned earlier or for which a Budget provision has been made, can be announced or inaugurated after the enforcement of the model code of conduct, the Commission says: "No. Inauguration/announcement of such a scheme is prohibited during election period."  

The scheme for issuing new bank licences was sanctioned and approved earlier, but the actual allotment of the licences will take place after the election schedule has been announced and the model code of conduct has become operational.

So, Rajan is not being overcautious. He is just playing safe by seeking the Commission's prior approval of what he intends to do.  

Interpretations, however, could differ. It could also be argued whether RBI can be defined as official machinery and, therefore, whether the model code of conduct can be enforced on it. But can RBI really be seen differently when its governor and deputy governors are appointed by the Union government?  

The fact of the matter is that the coverage of the Election Commission's model code of conduct is quite comprehensive. It bars most decision-making by the government between the day elections are announced and the day the election process is completed.  

For instance, work is not allowed to be started even in respect of which work order has been issued before the announcement of the elections but the work has actually not started in the field.  

However, work that has actually started in the field can be continued. Some exceptions are also made with regard to the implementation of the poverty alleviation programmes and some of the rights-based entitlement schemes for jobs and food.  

So, it would be interesting to see how the Election Commission would react if indeed the Cabinet or the Foreign Investment Promotion Board were to take some investment decisions and the government made an announcement to that effect.  

A safe approach would be to take the Commission's approval before making an announcement. This is precisely what Rajan has chosen to do in respect of bank licences.  

A few of the decisions that the Commission allows to be taken even during the election period is worth recounting here since it demolishes some current myths.  

For instance, contrary to what has been widely reported, the Fourteenth Finance Commission, chaired by Y V Reddy, can continue with its state visits and meetings even during the election period.

In response to a specific question on whether members of the Finance Commission of the Government of India can visit states, the Commission says: "Yes, provided neither press briefings nor press notes would be issued, highlighting the achievements of the State or otherwise."  

Similarly, the Commission for Agricultural Costs and Prices is allowed by the Election Commission to determine the minimum support prices for wheat and other agricultural products. But the caveat is that "a reference in the matter shall be made to the Election Commission."  

It is clear that what the Election Commission is worried about is not the act of decision-making, but its publicity which the government might use to reap electoral benefits. There can be no debate on that.  

But the question that arises, then, is whether the Commission could have simply allowed the governments to take decisions, but barred them from publicising these steps to influence voters.  

It would have been a tightrope walk, but this would have exonerated the Commission from the charge that its tough rules on the code of conduct bring to a halt even normal and routine government activity.