In June 2016, I wrote a piece about the hounding of Raghuram Rajan. At that time, Rajan was still at the Reserve Bank of India (RBI). However, it was clear that he was unwanted. Sure enough, he left soon thereafter.
Little did I realise then that I would be writing about the departure of Rajan’s successor, under even worse circumstances. While Urjit Patel’s statement cites “personal” reasons for his decision to quit, the “effective immediately” timeline speaks volumes. The Governor’s decision is no personal matter.
The ramifications of Patel’s decision go far beyond the Patel household or what might happen in stock and currency markets. In fact, this crisis is not about Urjit Patel but our institutions, which are under attack from the Modi government.
Domestic and foreign investors will take notice of this latest in a series of disruptions to India’s institutional architecture, which is a result of decades of painstaking effort.
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Time to Step Aside Was Before Demonetisation
I am no fan of Patel. While his qualifications and competence for the top job at our central bank are beyond reproach, he was complicit with PM Modi in unleashing demonetisation on an unsuspecting and innocent nation.
The time to speak truth to power was then.
The time to oppose the PM’s decision and to strenuously persuade him to change course was then. The time to step aside was then.
It appears to me that the current prime minister or any leader is ill-served by those who for whatever reason do not speak up when it is absolutely necessary to do so.
Reportedly, those around the prime minister are fearful of speaking their minds in his presence. No wonder the BJP leaders have an ‘all is well’ air about them. Perhaps Urjit Patel should have shared this quote by Joseph Stiglitz, an economics Nobel Laureate, with the prime minister: “Smart people are more likely to do stupid things when they close themselves off from outside criticism and advice. If there’s one thing I’ve learned in government, it’s that openness is most essential in those realms where expertise seems to matter most.”
Be that as it may, the country needed the RBI to help stabilise the economy. On that front, post demonetisation, the RBI has done a good job of providing the nation with a sense that our institutions are capable of cleaning up messes created by politicians.
RBI Baiters in RBI Board
The government and the RBI worked together to implement the monetary policy framework and things seemed to be going well for some time. However, this changed earlier this year as the government started asserting greater control over the RBI, which has traditionally maintained substantial operating autonomy.
Three issues deserve special mention. First, the government appointed an RSS-ideologue and a known RBI critic to the institution’s board. Second, the government demanded that the RBI transfer a much higher surplus to the government than usual because it feels the RBI’s surplus reserve is higher than global standards. Third, the government is creating an impression that the RBI’s stance is stifling credit, even as non-performing assets have grown.
Appointing RBI baiters, especially those with no apparent qualifications but their ideological rabble rousing, must have ruffled feathers at RBI. The prime minister may not value Harvard, as he implied last year, but to those who have worked hard to get world class education and training place a premium on competence and qualifications.
I can’t imagine how disrespected RBI officials must have felt when an arrogant and out-of-control government was browbeating them through political hacks.
“After suffering the ignominy of participating in voodoo-powered demonetisation, this must have been the proverbial last straw.”
NDA Govt Collected Twice the Surplus From RBI Than UPA
What about transfer of surplus funds to the government? First, a government that never fails to congratulate itself about high economic growth, higher tax collections, and more taxpayers, seems desperately out of funds. If all is well, and if the government collected over Rs. 10 lakh crores in fuel taxes, why are the government’s finances so tight? What about the fact that the RBI transferred Rs. 527 billion per year in the first four years of the Modi government while the UPA received just Rs. 292 billion per year in its last four years? That means the Modi government collected almost twice as much per year from the RBI than UPA did.
However, you didn’t find Dr Manmohan Singh running roughshod over the RBI. You didn’t see the government forcing Raghuram Rajan to reduce interest rates as the UPA was gearing up for a tough election in 2014. In fact, Rajan increased the rates on multiple occasions after he took over as Governor.
Finally, blaming the RBI for NPAs and credit problems is disingenuous. If Modi took advice from experts, I am certain he would have dealt with the NPAs in his first year.
Institutions such as the World Bank and IMF and the government’s own Economic Survey had flagged NPAs as a growing problem.
However, the problem in 2014 was much smaller. But, instead of unclogging the banking sector, which was necessary, Modi went after the land bill.
Instead of dealing with the lifeblood of the economy, Modi went on a tangent. That was a strategic blunder. Demonetisation and an incompetent GST rollout only compounded that original sin.
By attacking institutions such as the RBI, the Modi government is inviting a credibility crisis. We are only days removed from a revision of GDP numbers that, frankly, makes India look like a data manipulator. Team Modi is also undermining institutions such as the Election Commission, Information Commission, the CBI and many others. The impact of a rampaging government will be far greater than what most people imagine. As Patel’s predecessor, Raghuram Rajan, noted, “All Indians should be concerned about governor Patel's resignation.”
Manmohan Singh believes Patel’s resignation is a “severe blow” to the economy. If we don’t listen to these experienced voices, India will be the poorer for it.
(The author, formerly with the World Bank, is a member of the Indian National Congress. His forthcoming book on the economy under the Modi government is being published by Penguin Random House India.)
(This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)