It appeared inevitable, once the government propaganda machine went into overdrive to state that RBI Governor Urjit Patel had been suitably chastised and made to eat humble pie after the last board meeting of the RBI on November 19, 2018.
Ninety-six hours before the next congregation of the august members of the RBI Board, the much beleaguered Patel submitted his resignation with immediate effect. The discerning observers saw it coming. Patel’s decision was a fait accompli after a public spat that had assumed acrimonious dimensions, especially after the government invoked Section 7 of the RBI Act that gave it unilateral powers to dictate terms to the central bank ostensibly in the “larger public interest”.
RBI Deputy Governor Viral Acharya had set the cat among the pigeons when he publicly stated that the government’s flagrant intentions of strangulating the operational autonomy of RBI was fraught with grave risks and would eventually boomerang. The script is not unsurprisingly playing out, as he had predicted.
India has consequently sent out a disconcerting message to the global financial community, comprising of private equity, venture capital, foreign direct investors, investment bankers and fund managers. A central bank is meant to be sacrosanct, a consecrated institution that oversees monetary policy, currency markets and growth imperatives, usually but not always in synchronicity with the government apparatchiks.
Policy-making is a complex act and creative differences in troubleshooting are hardly unusual. But under Narendra Modi as Prime Minister, the Bharatiya Janata Party’s stance has been substantially categorical; it’s my way or the highway.
Urjit Patel, largely to keep his self-respect intact and to bring the asphyxiating throttling of the RBI under the public gaze, chose the latter option. At least the highway has fewer speed-breakers. In his resignation letter, Patel cited the convenient template of ‘personal reasons”. Nobody bought that.
Whether it was about relooking at Non Banking Financial Companies’ liquidity, restructuring of loans of the Micro Small and Medium Enterprises or developing new norms for board functioning, it was evident that Patel & co were being palpably stymied.
But perhaps the most contentious, almost intractable problem was the issue of RBI’s sizable reserves of ₹9.69 lakh crore; the government wanted to appropriate a large chunk, almost as if that was a matter of right. It smacked of financial profligacy as RBI was insistent that it needed sufficient capital to buffer for market volatilities. But a myopic, fiscally starved government appeared desperate. That appears to be the crux of the problem leading to Patel’s resignation.
India has consequently sent out a disconcerting message to the global financial community
RBI is not just about inflation-targeting. Its policies on interest rates, as a regulatory watchdog over the banking system, identifier of willful corporate skullduggery, keeping the exchange rate stable and ensuring macroeconomic stability, affects us all.
If the government begins to treat this erstwhile venerated institution as a mere prop of the Ministry of Finance, we are essentially saying goodbye to expert advice and welcoming whimsical populist politically-soaked decision-making in our economic policy.
Patel was still new in his job when Modi made his bombastic claim on November 8, 2016 that black-money will be obliterated because of his midnight knock on currency chests hoarding high-ticket notes. It proved to be as flaky as pie-crust. While Patel was perhaps given no elbow room to protest, the RBI had begun to look like a lame-duck puppet. Patel’s silence hardly helped.
When Finance Minister Arun Jaitley made the rather preposterous observation that the RBI (under Rajan) had deliberately understated NPA’s, an insidious lie, Patel did not rise in defence. It was an inexplicable surrender to a government that was imperceptibly debilitating RBI, destroying its credibility. Even when the Nirav Modi and Mehul Choksi scandals broke out, BJP spokespersons were apportioning the full blame on RBI’s alleged lack of due diligence in PSU banks’ supervision. Again, other than token resistance, the RBI took the big blows and continued to do the heavy-lifting, managing repo rates and intervening in FX markets when the Turkish lira took a hammering. But when Acharya lambasted the government for shackling its operational autonomy, an unprecedented tongue-lashing with the full-backing of Patel, one knew that the cookie had crumbled.
So, will the newly appointed Governor Shaktikanta Das happily concede RBI’s precious reserves to a struggling government already having crossed 103% of its fiscal deficit target by October 2018?
Is Mr Modi hoping to utilise that huge windfall for some generous sops in an election year to save his fast-dissipating credibility? Is the future of RBI now going to be determined by voodoo economists, RSS ideologues and government-appointed cheerleaders with no knowledge of FX markets, interest rate risks and regulatory mechanisms?
Under PM Modi, there has been an organised emasculation of institutional independence. The Central Bureau of Investigation is a pathetic mess, currently like a Kafkaesque quagmire, its sordid linen being given a daily sunshine before a disillusioned public. The RBI too has been reduced from its formidable intellectual and policy behemoth status to that of a whimpering surrogate of an authoritarian regime. It is sad. But me must fight. Because as Rajan correctly points out, it concerns us all.
(The writer is a Congress spokesperson)