Patel resignation adds to problems of sagging economy

K R Sudhaman

Clearly RBI Governor Urjit Patel’s abrupt resignation on Monday is yet another example of Prime Minister Narendra Modi’s government’s interference with independence of Institutions in the country. Patel has not spelt out the details of his resignation except to cite personal reasons, but if one reads between the lines as former governor Raghuram Rajan says; it is a clear statement of dissent over the face-off between this great central bank and the government over a range of issues including autonomy.

This is not the first institution, built over the years, since independence to be systematically destroyed by the Modi Government. It started with dismantling of Planning commission and replacing it with NITI Aayog, followed by face-off in judiciary including Supreme Court, UGC, film institute and more recently premier agency, Central Bureau of Investigation. These are clear indications of throttling of independent functioning of these institutions by government.

Raghuram Ram is right in saying that every Indian should worry about this action as it would have direct bearing on the economy. It is the credibility of the central bank which is at stake and the timing of the resignation has certainly sent wrong signals to central banks all over the world and multilateral institutions about the happenings in India.

Patel was appointed in 2016 for a three-year term, which was to expire in September next year and he is not the first RBI governor to resign. But it is for the first time a governor has resigned explicitly, apparently feeling the heat or so to say pressures from the government due to excessive interference ahead of the RBI board meeting, which was scheduled meet on December 14 in Kolkata., The previous board meeting in November that went for over nine and a half hours apparently was not cordial though the impression was that the meeting had thrashed out the differences. From the resignation it is now clear that the differences between the governor and the government have only persisted and perhaps widened. Dec 14 meeting was meant to discuss the progress on issues raised by the board’s government nominees last month.

In a series of tweets, Prime Minister Narendra Modi said Mr Patel leaves behind a great legacy. We will miss him immensely. But the reading of the situation seems to be that the government has pushed out the governor for the second time, the first being Raghuram Rajan. On the face of it, however, it may look as though the government had a no role. The 54-year old Indian economist Patel had served as deputy governor for three years under Rajan before his appointment as the governor on September 4, 2016..

After the last board meeting of RBI, it was pointed out that everything was hunky-dory, that all the issues have been resolved. So quite clearly the resignation of Patel shows that nothing has changed and things are as bad as before, former finance minister Yashwant Sinha said. His resignation is a clear sign of the government trying to interfere with the working of the RBI. The government is trying to destroy the autonomous character of the bank, Sinha said, adding that after the resignation of Patel there is no reason for the finance minister Arun Jaitley to continue in his post. Former union minister Arun Shourie said that he feels the ‘R’ in the RBI has been changed into a ‘C’ and the RBI is being made into another CBI, apparently referring to the ugly happenings in the premier investigative agency in recent months. The defaulters, who have looted the banks are not willing to pay back their loans, they and their lobbyists have triumphed once again as they did in Raghuram Rajan’s case. Patel’s resignation will be bad for our economy, RBI and the government, said senior BJP leader Subramanian Swamy. These were some of the reactions from people associated with the ruling party, which clearly reflects resentment within the party over the manner in which the government is run by Prime Minister Modi.

 

Patel’s resignation might have shocked everybody, but it is not surprising as there were reports last month itself suggesting that Patel was considering all options including resignation following unprecedented attack on the central bank’s functioning by Jaitley last month.

 

The government and the RBI have been fighting for weeks over how much autonomy the RBI should have as the administration of Prime Minister Narendra Modi seeks to reduce curbs on lending and to gain access to the RBI’s surplus reserves. The rift worsened in October when Viral Acharya, one of the bank’s deputy governors, said in a speech that undermining central bank independence could be potentially catastrophic.

 

Pate has been steadfast in maintaining the top bank’s independence and in handling the bad loan cases. Within a month of Patel taking over the top job at the RBI on September 4, 2016, the Monetary Policy Committee (MPC) framework was introduced to decide on rates as part of the efforts to deal with inflation. Despite often being called reticent, Patel has also been speaking up his mind through his lectures and articles, at his regular post-policy press meets and also before parliamentary panels. Officials at the RBI say his main focus has always been on implementing things. Within days of the demonetisation move also, when he was being criticised by one and all for not speaking up, Patel had reportedly said in November 2016 that the central bank was taking all necessary actions to ease the genuine pain of citizens with a clear intent to normalise the things as early as possible.

Before his stint in the central bank, Patel, who holds a PhD in economics from Yale University and MPhil from Oxford, was an advisor to the top consulting firm Boston Consulting Group (BCG).

 

The simmering differences between the RBI and the government over three key issues, which included excess reserves, boiled over in October. The government was seen to be ramping up pressure on the bank to release the reserves, which, critics said, would be used to boost the economy in an election year. There were apprehensions that the government might try to force the Governor’s hand through the bank’s board, which the government has filled with its men.

The disagreement first came to light when a top RBI official — Viral Acharya — claimed in a speech on October 26 that the government’s efforts to undermine the central bank’s independence would be potentially catastrophic for the country. The official clarified that he was not speaking in his personal capacity. The cause of the conflict is supposed to be Section 7 of the Reserve Bank of India Act, which empowers the government to issue directions to the central bank as a last resort. The provision had never been used before. The government reportedly wanted to use the provision to control lending rates and also get its hands on reserve cash kept in RBI coffers. The central bank maintains that such a step would throw the country’s economy into disarray should a financial emergency arise. The RBI holds Rs. 28,724 billion in reserves, including foreign currency assets, gold and sovereign debt receipts, and some of the profit earned through interest on its bonds is given to the government. But the government wants more for spending on welfare programes ahead of the Lok Sabha elections in April –May 2019. Differences also cropped up between the RBI and the centre on other issues such as the central bank’s handling of weak public sector banks and ways to resolve bad loans in the power sector. The government had reportedly asked the central bank to ease lending restrictions on around 11 state-run banks with a low capital base. The centre also proposed changing the rules to enable closer supervision of the RBI, a move that many believed would undermine investor confidence in the country’s economy.

 

Patel’s resignation is certainly a serious embarrassment to the Modi government as it clearly reflected the larger issues that divided the centre and RBI, which related to the autonomy and the independent functioning of Governor. It may not be first time that RBI Governor. This is the fifth time it has happened but never before the differences between the government and central bank have been so pronounced, which did not augur well for the economy. One only hopes that the new governor is not a yes man of the government and independent and a competent economist is appointed so as to steer the economy through the difficult times.

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