The Tehelka Editorial “RBI-Government row: Centre tells who is the boss?”, analyses “RBI-Central Government on a collision course” and “Tiff, mistrust grow over RBI’s surplus reserves” , all clearly hinted that all was not well between the government and the Central Bank. Now as expected, in a major embarrassment for the government, the RBI Governor Urjit Patel, who had been handpicked for the job has put in a snap resignation.
The honeymoon has not lasted long. The development is stunning, sudden and shocking. Though Patel has cited ‘personal reasons’ for stepping down, if you read between the lines you would know that this development was anything but the ‘personal reasons’. This comes on the heels of an escalating tussle between the central bank and Union government over autonomy and independence of the RBI and RBI Governor. It also comes ahead of the crucial board meeting, where the government was likely to demand more concessions from the RBI. For the record, Kenya born Patel’s three-year term as RBI Governor was to end in September 2019. With his resignation, he has become the first Governor in the post-liberalization era to quit before the end of his term and fourth in the history of the RBI. The previous resignation came in the year 1975.
New Governor appointed
Though the Government has been quick to appoint Shaktikanta Das as the new Governor of RBI, damage seems to have been done already to government’s ability to respect talent. Das is the 25th Governor of the Central Bank. A former economic affairs secretary from 2015 to 2017, Das worked closely with the central bank. He is currently a member of the Finance Commission of India, and the government’s representative at the Group of 20 summits.
Coming back to Patel’s resignation, it is a serious embarrassment to the government. Tweets from the prime minister, Narendra Modi, and the Finance Minister, Arun Jaitley have extolled Patel and praised him for his work. It is an attempt to show that the later did indeed resign only for personal reasons. However, these laurels appeared largely unconvincing.
Prime Minister Narendra Modi said, “Urjit Patel is an economist of a very high caliber with a deep and insightful understanding of macro-economic issues. He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability”.
Finance Minister Arun Jaitley wrote: “The government acknowledges with a deep sense of appreciation the services rendered by Dr Urjit Patel to this country both in his capacity as the Governor and Deputy Governor of the RBI”.
Former RBI governor Raghuram Rajan observed that through his resignation “Dr Patel has made a statement and this is the ultimate statement a regulator or a civil servant can make. We should go into the details as to why there was an impasse, which forced this ultimate decision… this is something all Indians should be concerned about because the strength of our institutions is really important”. P Chidambaram, former Finance Minister commented “Saddened, not surprised, by Dr Urjit Patel’s resignation. No self-respecting scholar or academic can work in this government”.
Patel’s resignation is bound to raise questions about the Centre’s ability to work with independent-minded economists. A day after Patel’s resignation, noted economist Surjit Bhalla resigned as a part-time member of the Economic Advisory Council to the Prime Minister(EAC-PM). Earlier, Niti Aayog Vice-Chairman Arvind Panagariya and Chief Economic Adviser Arvind Subramanian had resigned.
Roots of discord
The simmering discontent between RBI and government could be seen in the speech of Dr. Viral V Acharya, Deputy Governor of RBI during his AD Shroff Lecture in Mumbai on October 26, 2018. He had cautioned “Using central bank reserves to pay government obligations is not a positive development and the concept of excess reserves is certainly open to debate. It weakens the balance sheet of the central bank.” He had reasoned the risks of undermining the central bank’s independence as potentially catastrophic, a “self-goal” of sorts, as it can trigger a crisis of confidence in capital markets that are tapped by governments to run their finances”.
Four days later, the Finance Minister, Arun Jaitley during an event hosted by US-India Strategic and Partnership Forum (USISPF)accused the RBI of sleeping on the job to check indiscriminate lending by public sector banks between 2008 and 2014.
For quite some time, reports have been circulating in the public space that the Government was planning to invoke Section 7 of the Reserve Bank of India Act to ask the central bank to hand over a part of its surplus reserves to put that to more productive use. The matter is pending before the Board of the RBI and is likely to be taken up again at its next meeting likely on November 19. Will the scheduled meeting now be held or not in view of the sudden resignation of RBI Governor is a big question?
To put the record straight, the Finance Minister made it clear “We don’t need any extra funds from any other institution to finance our fiscal deficit. Let’s be very clear that’s not the intention of the government. And we are not saying that in the next six months give me some money”. He, however, said that surplus funds could be used for poverty alleviation programmes by future governments over the next several years. The RBI is reported to be holding a massive 9.59 lakh crore of reserves. He also added that “The government’s viewpoint is that we respect and we will always maintain the autonomy within the framework of the laws which have been laid down.” Subhash Chandra Garg, Secretary of the Department of Economic Affairs, tweeted: “A lot of misinformed speculation is going around. The government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated.” The clarification came amidst report that the government is seeking transfer of at least a third of Reserve Bank’s 9.6 lakh crore reserves.
All eyes on new Governor
In the meanwhile, speculation about the timing of Dr. Patel’s decision continues. He resigned on December 10, 2018, a day before results to five assembly elections were to be announced and a few days prior a meeting of RBI Board slated for December 19. There are questions whether the government is trying to silence dissent and whether the resignation is a bold statement to protect the RBI’s autonomy?
The priority for the government would be to tell the world that it stands for the autonomy of the institutions and it does not treat the RBI as just another government department.
In the meanwhile, speculation about the timing of Dr Patel’s decision continues. Questions remain whether the resignation is a bold statement to protect the RBI’s autonomy? All eyes are now on the new Governor, Shaktikanta Das.
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