Modi government, Indian central bank set for uneasy truce -sources

People walk past the Reserve Bank of India (RBI) head office in Mumbai, India, November 9, 2016. (REUTERS)
Updated 15 November 2018
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Modi government, Indian central bank set for uneasy truce -sources

  • Modi had appointed Patel as the RBI governor in 2016 for a three-year term that ends in September next year
  • There are five key state elections in the next few weeks and a general election due by May

NEW DELHI/MUMBAI: India’s government and its central bank are getting close to ironing out some of their policy differences, said two sources familiar with the discussions, as they seek to defuse worsening tensions that had threatened to unnerve investors.
While the rift is far from healed, the sources said enough progress had been made to avoid acrimony at a board meeting of the Reserve Bank of India (RBI) next Monday. The threat that RBI Governor Urjit Patel would quit, as reported by some Indian newspapers last week, is also thought to be off the table for now, they said.
The uneasy truce is likely to see the RBI ease up on some lending restrictions to help the government stimulate the economy, said the sources. One source said the central bank could agree to tweak restrictions on lending to improve credit flows for smaller companies with a borrowing limit of 250 million rupees ($3.4 million).
Neither the RBI nor the finance ministry responded to requests for comment for this article. The prime minister’s office declined to comment.
It is unclear how much of a role Prime Minister Narendra Modi played in defusing the tension. Local media reported that Modi met Patel last week in an attempt to sort out the contentious issues but officials in the prime minister’s office and the RBI said they did not know of such a meeting.
Modi had appointed Patel as the RBI governor in 2016 for a three-year term that ends in September next year.
For weeks, government officials in New Delhi have been pressuring the Mumbai-based RBI to accede to a range of demands, from easing lending curbs to handing over surplus reserves to the government. This prompted RBI Deputy Governor Viral Acharya to warn late last month that undermining a central bank’s independence could be “catastrophic,” bringing the feud into the open.
Tensions were expected to come to a head at Monday’s meeting as government representatives on the board appeared to be ready to turn up the heat on Patel and accuse the RBI of being intransigent in the face of government demands.
Now, it seems likely there will be a more constructive atmosphere with agreement on some issues, and disputed questions shelved for another day, the sources said.
CAN’T AGREE TO EVERYTHING
The government is keen to provide more stimulus to the economy heading into next year’s election, especially as the incomes of many farmers have been hit by low crop prices. At the same time it doesn’t want a bust-up with the central bank, which could badly affect investor sentiment and provide political fodder to the opposition Congress party.
“The government understands the regulator will remain a regulator and can’t agree to all demands,” said a government official, who declined to be named, referring to the RBI.
While the official did not give any details of the solutions being worked out with the RBI, he acknowledged that the government did not want to trigger Patel’s departure at such a sensitive time.
There are five key state elections in the next few weeks and a general election due by May. The Congress party has already been harrying the government over allegations of corruption in a military jet deal with France and infighting between the top officials of India’s equivalent of the FBI.
A RBI board member said that helping to ease tensions was the idea that both sides wanted a healthy economy. It was just a question of how to get there.
“The main issue is how to boost credit growth,” the member said referring to the credit crunch facing small companies.
Economics Affairs Secretary S.C. Garg is expected to make a presentation in the board meeting to outline the concerns of the finance ministry and could bring up the question about the transfer of surplus cash reserves held by the RBI, the sources said.
The board member said that an expert panel may be set up to work out the appropriate level of contingency reserves for the RBI, effectively kicking that question down the road.
The RBI introduced a so-called corrective action plan in 2014 for 11 state-run banks with bad loan issues and depleted capital. That plan included curbs on risky lending and RBI officials said, as a result, the banks’ loan growth fell to zero and had remained there since 2016, from 10 percent in 2014.
According to the RBI board member, the government wants the RBI to ease those curbs and lower capital requirements for the 11.
Some improvements in the balance sheets of those lenders might give the RBI leeway to do that, although the RBI would prefer to give the mending process more time, said another official who is aware of discussions within the central bank.


Foreign investors hope India dials back policy shocks after Modi win

Updated 24 May 2019
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Foreign investors hope India dials back policy shocks after Modi win

  • Modi’s pro-business image and India’s youthful population have lured foreign investors
  • After Modi’s win, about a dozen officials of foreign companies in India and their advisers said they hoped he would ease his stance and dilute some of the policies

NEW DELHI: Foreign companies in India have welcomed Prime Minister Narendra Modi’s election victory for the political stability it brings, but now they need to see him soften a protectionist stance adopted in the past year.
Modi’s pro-business image and India’s youthful population have lured foreign investors, with US firms such as Amazon.com , Walmart and Mastercard committing billions of dollars in investments and ramping up hiring.
India is also the biggest market by users for firms such as Facebook Inc, and its subsidiary, WhatsApp.
But from around 2017, critics say, the Hindu nationalist leader took a harder, protectionist line on sectors such as e-commerce and technology, crafting some policies that appeared to aim at whipping up patriotic fervor ahead of elections.

Opinion

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“I hope he’s now back to wooing businesses,” said Prasanto Roy, a technology policy analyst based in New Delhi, who advises global tech firms.
“Global firms remain deeply concerned about the lack of policy stability or predictability, this has sent a worrying message to global investors.”
India stuck to its policies despite protests and aggressive lobbying by the United States government, US-India trade bodies and companies themselves.
Small hurdles
Modi was set to hold talks on Friday to form a new cabinet after election panel data showed his Bharatiya Janata Party had won 302 of the 542 seats at stake and was leading in one more, up from the 282 it won in 2014.
After Modi’s win, about a dozen officials of foreign companies in India and their advisers told Reuters they hoped he would ease his stance and dilute some of the policies.
Other investors hope the government will avoid sudden policy changes on investment and regulation that catch them off guard and prove very costly, urging instead industry-wide consultation that permits time to prepare.
Protectionism concerns “are small hurdles you have to go through,” however, said Prem Watsa, the chairman of Canadian diversified investment firm Fairfax Financial, which has investments of $5 billion in India.
“There will be more business-friendly policies and more private enterprise coming into India,” he told Reuters in an interview.
Tech, healthcare and beyond
Among the firms looking for more friendly steps are global payments companies that had benefited since 2016 from Modi’s push for electronic payments instead of cash.
Last year, however, firms such as Mastercard and Visa were asked to store more of their data in India, to allow “unfettered supervisory access,” a change that prompted WhatsApp to delay plans for a payments service.
Modi’s government has also drafted a law to clamp similar stringent data norms on the entire sector.
But abrupt changes to rules on foreign investment in e-commerce stoked alarm at firms such as Amazon, which saw India operations disrupted briefly in February, and Walmart, just months after it invested $16 billion in India’s Flipkart.
Policy changes also hurt foreign players in the $5-billion medical device industry, such as Abbott Laboratories, Boston Scientific and Johnson & Johnson, following 2017 price caps on products such as heart stents and knee implants.
Modi’s government said the move aimed to help poor patients and curb profiteering, but the US government and lobby groups said it harmed innovation, profits and investment plans.
“If foreign companies see their future in this country on a long-term basis...they will have to look at the interests of the people,” Ashwani MaHajjan, an official of a nationalist group that pushed for some of the measures, told Reuters.
That view was echoed this week by two policymakers who said government policies will focus on strengthening India’s own companies, while providing foreign players with adequate opportunities for growth.
Such comments worry foreign executives who fear Modi is not about to change his protectionist stance in a hurry, with one offical of a US tech firm saying, “I’d rather be more worried than be optimistic.”