DisFact #7: What the CBI drama and RBI deputy governor's speech tell us about India's public institutions

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The health of India’s public institutions—not so good

On August 26, 2016, Prime Minister Narendra Modi said:

There was a time when development was believed to depend on the quantity of capital and labour. Today, we know that it depends as much on the quality of institutions and ideas.

Following Modi’s speech, a Mint editorial noted that Modi’s comment seems to be partly inspired from the 2012 book Why Nations Fail by Daron Acemoglu and James A. Robinson. “In their thought-provoking book, Acemoglu and Robinson argue that institutions, and they alone, determine the prosperity of a nation.

Does the Prime Minister really believe so? Looking at recent events, the answer is: not really.

The incidents of this week highlight problems brewing in India’s two major public institutions:

  • First, the Central Bureau of Investigation (CBI): a sort of war erupted between the two top officials (#1 and #2 in the hierarchy) in India’s premier investigating agency.

  • Second, the Reserve Bank of India (RBI): In a hard-hitting speech, the deputy governor of the otherwise reclusive RBI, flagged concerns about government interference in the functioning of India’s central bank.

The big picture: It is important to read the two stories in the larger context of the state of India’s public institutions. Equally crucial is to note that the problem is not limited to the rule of the current Modi government; these are historical challenges. What’s clear is how little things have changed under the present regime. Critics argue that the situation has become worse.

In February, political scientist Milan Vaishnav questioned if “India’s elite institutions are as healthy as we had once thought”. In an op-ed for Mint, Vaishnav looked at incidents in the preceding years to show how the credibility of three big institutions— Election Commission of India, the Supreme Court and the RBI—had come under question. Just add the latest tensions to the growing list of such incidents.

If you consider these aberrations, you are missing the big picture, Vaishnav wrote. It rather points to multiple systemic challenges India’s core federal institutions face. Four major points:

  • Human capital: “First, across the board, Indian institutions continually struggle with managing human capital, as evidenced by the unending morass concerning judicial appointments.”

  • Quality of external accountability: “Second, exogenous actions, like the passage of the Right to Information Act, have compelled greater accountability to the public. Yet the quality of external accountability is in doubt, as evidenced by how all three institutions have struggled to balance the demands of public justification with the temptation to hold on to discretion.”

  • Centralised power: “Third, internal accountability mechanisms have largely foundered. In nearly all Indian institutions, power remains far too centralized in the hands of the chief.”

  • Political interference: “Fourth, political interference remains an ever-present obstacle. Much of this interference comes down to subverting behavioural norms rather than actual violations of the law.”

With this context in place, read what happened this week in the CBI and the RBI.


The fault in our…investigating agency

What transpired in the CBI this week could have well been a movie script. There are two main characters in the story.

  • Alok Verma, CBI Director: #1 official of the CBI

  • Rakesh Asthana, CBI Special Director: #2 official (He is said to be close to Prime Minister Modi.

Background

  1. The story began in mid-2017. Verma, the CBI Director, was not being allowed to appoint a few officers of his choice within the CBI.

  2. That became controversial in October 2017, when Verma opposed the promotion of Asthana to the post of Special Director.

  3. Verma handed over a confidential note to the Central Vigilance Commission (CVC) during a panel meeting over Asthana’s promotion, alleging corruption on Asthana’s part with regard to the Sterling Biotech case of August 2017.

    It alleged that according to a diary found on the premises of the company, Asthana was paid Rs 3.88 crore by the company (which in October came under probe for loan defaults of over Rs 5,000 crore). The CVC panel unanimously cleared Asthana’s promotion, disregarding Verma’s submissions. It said the allegations were not verifiable. (Indian Express)

  4. June 2018: Verma targeted Asthana again. He said the Asthana could not represent him in his absence in a CVC meeting over CBI appointments as Asthana was being probed for alleged corruption.

  5. Asthana hits back in August 2018: The #2 wrote to the Cabinet Secretary “that Verma was interfering in his probes and had tried to stall a raid on Lalu Prasad in the IRCTC case. He also alleged corruption on Verma’s part.”

Recent events

  1. Last week, Verma launched a probe against Asthana and got another officer who had worked with him on a case arrested.

  2. This week, the Central government stepped in to resolve the battle: both Verma and Asthana were “divested of all powers” and asked to go on leave. Joint Director M. Nageshwar Rao was put in charge of the organisation.

  3. Verma approached the Supreme Court to challenge Centre's decision to send him on leave, saying that the move was illegal.

  4. SC takes over: The Supreme court asked the CVC to complete its inquiry into allegations against Verma within two weeks. The inquiry will be conducted under the supervision of a former SC judge. The government is out—for now.

  5. Political angle: Congress President Rahul Gandhi alleged that Verma was removed to save Modi from the so-called “Rafale scam”.

Go deep: For more nuanced details of the case, read these explainers in Scroll.

Takes

1. A lower low (Indian Express): The CBI has a history of politicisation. In 2013, the Supreme Court said that “CBI has become a caged parrot speaking in its master’s voice”, referring to political interference in the agency’s functioning.

But things have never been this bad, argues Ritu Sarin, investigations editor of the Indian Express, who has tracked the CBI for almost two decades. This may be the lowest the investigating agency has sunk, but it’s not just the two officials to blame. The government also contributed by creating a ‘poisonous’ situation and allowed it to fester.

Notably, the current unprecedented crisis of credibility of the CBI has come in a tenure when the agency is, in comparison to previous terms, handling relatively smaller matters of political significance. Through Asthana, the government chose to plant a line parallel to that of the director and did not change its stance when the signaling was clear and when Verma first opposed his promotion and then complained to the Central Vigilance Commission about the special director representing him at a key meeting. That was in July this year, and since then, the faultlines in the premier investigating agency have been getting exposed with every passing day.

2. Ego clash? No, it’s more than that: In Mumbai Mirror, Josy Joseph, investigative reporter and author of the book “A Feast of Vultures: The Hidden Business of Democracy in India”, argues that the narrative to paint the crisis as ego clash between the senior-most officers of CBI is false. Read here.

The entire fight in CBI was not any ego clash between two senior officers, but the CBI chief trying to act against a senior officer suspected of illegal actions. Verma’s own morality and legal conduct is for a separate inquiry. It cannot be mixed up with Asthana’s conduct, the ruthless cover up provided by the government to Asthana, and its continuing assault on the autonomy of the investigation agency.

3. What the crisis in India’s top investigative agency reveals about Modi’s government (Washington Post): Journalist Barkha Dutt argues that this public spectacle signals Modi’s loosening grip over both institutions and political messaging. “Modi has been masterful at communication; it’s a key reason for his electoral domination. Yet he has been curiously silent.”

Claims of this [sending officers to leave] being a considered and neutral decision to clean up the CBI have been belied by several facts. First, the government order came in the middle of the night, betraying a distinct and mysterious anxiety. Second, claims of equidistance were demolished by the fact that Asthana, the No. 2 who has been close to the ruling BJP party’s president, as well as to Modi since his years as Gujarat chief minister, appeared to get the better end of the deal. The entire team set up by his boss to investigate the charge of bribery against him was transferred out. And finally, the interim director appointed by the government has been dogged by a spate of his own corruption controversies.


RBI is not happy with the central government’s interference.

What: On Friday, Viral Acharya, the deputy governor of the Reserve Bank of India said that the government undermining a central bank’s independence could be “potentially catastrophic”.

In a speech, Acharya said:

I chose for today’s occasion the theme of the importance of independent regulatory institutions, and in particular, that of a central bank that is independent from an over-arching reach of the state. This theme is certainly one of great sensitivity but I contend it is of even greater importance to our economic prospects.

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.

Acharya’s speech follows a dissent note published by the RBI last week:

Last week, the RBI also published an unprecedented note expressing its opposition to the government’s moves to establish a separate regulator for the payments system, which is currently handled by the RBI as part of its functions related to banking regulations. (Reuters)

Why this is significant:

The comments by Reserve Bank of India (RBI) Deputy Governor Viral Acharya showed that the central bank is pushing back hard against government pressure to relax its policies and reduce its powers ahead of a general election due by next May, and as Indian financial markets have been dropping in recent weeks. (Reuters)

Where RBI and the government have clashed: The RBI and the government have not been on the same page on a few matters in recent times. BloombergQuint’s Ira Dugal lists the four publicly known battles being currently fought between the two.

  • “The Reserve Bank of India wants to keep weak government banks under a corrective action programme. The government thinks the framework is too stringent and wants it relaxed.”

  • “The RBI asked banks to follow a rule-based approach to bad loan resolution in a Feb. 12 circular. The government pushed hard to get that diluted.”

  • “The government wants a payments regulator, independent of the RBI. The RBI thinks it’s imprudent to take payment regulations away from the monetary authority.”

  • “The government needs resources. It thinks the central bank is sitting on excess capital. The central bank says this capital only strengthens the position of the economy.”

Not new: The debate on RBI’s autonomy is not new. It is as old as the central bank itself. In 2016, the issue rose to prominence in the wake of the demonetisation exercise. Here is a 2017 essay by Tamal Bandyopadhyay in Mint exploring this debate. (RBI, finance ministry and autonomy, Mint)


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