The central government and banking regulator Reserve Bank of India (RBI) seem to have been at each other’s throats the last few days. I’m not the least surprised at this, only at the fact that it took so long to happen. The latest development is a none-too subtle hint from the government that it might enforce Article 7 of the RBI Act of 1934.This rule, stripped of polite jargon, allows the government to arm-twist RBI ‘in the public interest’. It has never been invoked by any government, including the British colonial one, in 83 years. There are at least 10 points of contention between RBI and GoI. But the trigger for the showdown was probably a speech by the central bank’s deputy governor Viral Acharya in Mumbai on October 26.He said, “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 began with a cricketing analogy, comparing the government’s priorities to a T20 game and RBI’s to a five-day Test match.He argued, logically, that no government could think beyond five years or less, because of the election cycle and all the sops, handouts and freebies that were dished out to win another term. RBI, on the other hand, was unconstrained by such pressures and could afford to think and plan for longer-term policies to strengthen systems, keep banks strong, manage exchange rates, inflation and interest rates.Trouble arises when myopia meets long-term vision. This is exactly what has happened. Finance minister Arun Jaitley says India’s banking crisis — some reckon bad loans to have swelled to near- Rs 11 lakh crore — is because RBI did not discipline lending patterns during 2004-14, the two terms of the Congress-led UPA governments.Elections to five states will take place through November-December this year. Five months later, Lok Sabha polls are due. The government is on overdrive to display its achievements to voters. This includes a 180-m-tall statue of Sardar Patel in Gujarat that cost an astronomical Rs 3,000 crore, money that could have been spent productively on creating jobs.Concrete Proof But the economics of things — the ‘real’ economy in jargon — is separate from the economy of money and finance, right? Wrong. The two are linked inseparably. Think of housing, indisputably a part of the real economy.A note published on October 17 by investment bank Credit Suisse shows that in the top eight cities of India, housing sales have crashed from 2015 to today.In the second half (October-March) of 2015, 1,40,000 residential units were sold. In the first half of 2018 (April-September), this number came down to 1,20,000 units, a fall of a little more than 14%. Launches of new residential property have also slowed, from around 1,30,000 projects in H2 of 2015 to 90,000 in H1of 2018. This is a fall of nearly 31%.On October 26, a report by Kotak Securities showed the aggregate outcome of this dip in sales. In the top three cities of India, Mumbai, Delhi-National Capital Region (NCR) and Bengaluru, builders are saddled with huge volumes of unsold property, called ‘inventory’ in jargon.At 30.2 million sq ft, Mumbai tops the list of completed and under-construction inventory. Delhi-NCR, with 22.8 million sq ft of unsold property, comes next, followed by Bengaluru with 21.6 million sq ft. The top 50 property developers in India are saddled with 693 million sq ft of unsold real estate.Now, institutions that lend money to buyers and builders alike are mostly classified as non-banking financial companies (NBFCs). Almost every buyer with a mortgage pays up regularly on time. But builders whose projects are either stuck midway or completed but unsold are the real heavyweight borrowers — and defaulters.In good times, it’s easy to sell property and keep borrowing more for future developments. But when the cycle turns, it’s practically impossible to pay even the interest on their massive loans, forget the principal.Now, the thing about NBFCs is that they are allowed to lend, but aren’t allowed to accept deposits the way banks can. So, NBFCs, in turn, borrow in bulk from banks, and lend on to builders and buyers at a slightly higher rate than bank loans. But when NBFCs don’t get paid, how will they pay back banks?Mend the Bend Infrastructure Leasing and Financial Services (IL&FS) — whose largest shareholder is State-owned Life Insurance Corporation of India (LIC), Japanese and Abu Dhabi financial companies, as well as India’s largest private sector property lender HDFC —turned turtle through September, when it started defaulting on hundreds of crores worth of loans. Its total debt is Rs 91,000 crore, of which Rs 57,000 crore is borrowed from banks.On October 31, rating agency S&P said, “India’s financial markets are facing a trust deficit.” So, from the real economy of real estate, distress has spread to the heart of our financial system. This is no time for the government to gloat over its Patel statue or engage in petty tu-tu-main-main with RBI. It must get down to the real work of repairing the financial system.