Ministry Of Finance (FM):
- Formed on 29th October 1946
- Headquarters: New Delhi.
The Ministry of Finance is an important ministry within the Government of India concerned with the growth of the Indian economy. It manages our tax system, financial laws, the financial institutions, capital markets and Centre and State finances. It also deals with the Union Budget.
The Union Finance Ministry comprises of five departments namely Department of Economic Affairs, Department of Expenditure, Department of Revenue, Department of Financial Services, Department of Investment and Public Asset Management.
Reserve Bank Of India (RBI):
- Formed on 1st April 1935
- Headquarters: Mumbai, Maharashtra
It is the apex of the banking system in India. Apart from regulating banks it provides important financial services like storing of foreign exchange reserves, control of inflation, etc. Its main functions include financial supervision, regulator and supervision of the financial system and issuing currency.
RBI is managed by a Board of 21 Directors comprising of 1 Governor, 4 Deputy Governors, 2 Finance Ministry Representatives, 10 government nominated directors to represent important elements of India’s economy, and 4 directors to represent local boards headquartered in Mumbai, Kolkata, New Delhi and Chennai.
What is the difference between the two bodies?
Finance Ministry has a political role with the responsibility to ensure a strong economic growth. They adopt a risky strategy to boost growth.
Whereas RBI has a bureaucratic role with the responsibility to ensure stability of the banking system and maintain relatively low inflation. They avoid decisions which have higher risk involved.
RBI and Finance Ministry often look at the welfare of the economy from opposite sides and in their own different ways and challenge each other which may sometime turn out positive and sometimes not.
Where does the conflict between them arise?
The main job of RBI is to govern monetary policy, control money supply and inflation in the economy. So, when inflation soars, RBI tries to curb it by increasing the interest rate and thereby reducing the money supply in circulation.
While the government’s job is to foster growth in the economy, preferably with the help of lower interest rates.The Finance Minister says, the RBI should lower the interest rate so that economy can gain momentum while RBI says, the government should focus on infrastructure development and repairing the leakages in service delivery system so that inflation can be brought down and it this will help RBI reduce the interest rates.
This conflict has been a common affair in Indian economics. It occurred when P. Chidambaram was finance minister and D Subbarao was the RBI governor in 2008 and it has happened again with Arunj Jaitley who is the Finance Minster and Raghuram Rajan who was the former RBI governor. Want to read articles like this? Comment to let us know!