Ahead of a meeting with the central bank governor Tuesday, Finance Minister Arun Jaitley criticised India’s central bank for failing to prevent lending excesses in the past.
“You see (between) 2008 to 2014, after the global economic crisis, to keep the economy artificially going, banks were told open your doors and lend indiscriminately,” Jaitley said at India Leadership Summit organised by US-India Strategic Partnership Forum.
“The central bank looked the other way, there was indiscriminate lending,” he said.
The government of the day, he said, was pushing banks to lend which resulted in credit growth in a year shooting up to 31 per cent from the normal average of 14 per cent.
The finance minister and RBI governor Urjit Patel were set to meet later amid mounting tension between them over the autonomy of monetary policymakers. Jaitley will chair a meeting of the Financial Stability and Development Council, which Patel is scheduled to attend.
The meeting comes days after central bank Deputy Governor Viral Acharya’s speech warning of the risks arising from the government encroaching on its freedom. The All India Reserve Bank Employees Association on Monday also warned the government that “undermining the country’s central bank is a recipe for disaster” and what they (government) are trying “is at the expense of the nation”.
The speech prompted former Finance Minister Palaniappan Chidambaram to urge the government and the Reserve Bank of India to work behind closed doors to iron out their differences.
The central government is reportedly upset about the rift being made public. Senior officials who spoke to news agency Reuters said the government fears it could tarnish the country’s image among investors.
What the RBI had said
On Friday night, Acharya warned that undermining a central bank’s independence could be “potentially catastrophic”.
Delivering the A D Shroff Memorial Lecture in Mumbai, Acharya said that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.”
He cited the Argentine government’s meddling in its central bank’s affairs in 2010 as an example of what can go wrong. That led to a surge in bond yields that badly hurt the South American economy.
