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Urjit Patel quits: Cry for RBI autonomy or inability to work with Modi govt on economy?

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The Reserve Bank of India Governor Urjit Patel resigned from his post Monday citing “personal reasons”, ending weeks of speculation and a rather public feud with Prime Minister Narendra Modi government over a range of issues. Patel’s 3-year term was to expire in September 2019. Former RBI Governor Raghuram Rajan said the resignation should be read as a “statement of protest”.

ThePrint asks: Urjit Patel quits: Cry for RBI autonomy or inability to work with Modi govt on economy?

Last fig leaf that Modi govt is pursuing — sensible liberal economic policies — is now gone

Vivek Dehejia
Resident senior fellow, IDFC Institute, Mumbai

Urjit Patel’s resignation as RBI governor is nothing short of a catastrophe for sensible economic policy in India. Patel had been holding out, correctly, for the functional autonomy of the RBI to set monetary policy and ensure financial stability, and, correctly, resisting the government’s attempts to whittle away that autonomy and convert the RBI into a board-run central bank.

We have seen this movie before in other emerging economies, recently in Argentina, Turkey, and elsewhere. It takes years of hard work to build the credibility of monetary policy and create a strong central bank. It takes minutes to destroy it, as the government has now accomplished with the departure of Patel.

With Patel’s resignation, the last fig leaf that the Modi government is pursuing — credible and sensible liberal economic policies — is now gone. Fully expect the next governor to be a pliant individual who can be easily cajoled into doing the government’s bidding. The consequences for the economy, in the long run, will be dire with a weak and volatile monetary policy and reduced financial stability. I predict that this today, 10 December 2018, will be seen as a turning point in India’s economic development, and that is tragic.

Also read: Undermining autonomy of RBI is the opposite of Modi’s promise of good governance

Reform of RBI board’s governance can ensure discord is sorted early

Radhika Pandey
Economist, NIPFP

The recent instances of disagreement between the central government and the RBI are a reflection of the loopholes in the functioning of the RBI board. The contentious issues such as the transfer of RBI profits to the government and the optimal level of capital that RBI should hold, emergency funding of NBFCs and easing of restrictions should have been discussed at the board level. It is healthy to have disagreements between the independent directors of the RBI board and the management.

The decisions could have been preceded by extensive deliberations, review of global best practices and arriving at a consensus view. Instead, what followed was a public spat that adversely affected relations — leading to the government invoking Section 7 of the RBI Act.

What lies at the heart of the problem? The functioning of the board is delegated to the Central Committee of the board. Practically all decisions are taken at the level of the Central Committee of the board and the RBI board approves the same. When some board members expressed disagreement on some issues, it turned into a government vs RBI turf battle, raising questions about the independence of the RBI. The governor’s resignation is unfortunate. Efforts should be made to reform the governance of the RBI board so that such instances of discordance are sorted at the board level.

Also read: Is Viral Acharya speech just another fight or shows Modi govt’s inability to work with RBI?

Reward for RBI’s cleaning up after demonetisation has been an attack on its autonomy

Salman Anees Soz
Congress party member and ex-World Bank member

I am no fan of Urjit Patel. However, his departure is yet another milestone in the Narendra Modi government’s war against our institutions. While Patel’s qualifications and competence for the top job at our central bank are beyond reproach, he was complicit in unleashing Modi’s mindless demonetisation on an unsuspecting nation. The time to act was then. Unfortunately, Patel did not. However, the RBI did step up to clean up the mess and stabilise the economy. The reward for the RBI came in the form of an attack on the institution’s autonomy.

While Patel’s statement cites “personal reasons” for his decision to quit, this is no personal matter. The ramifications go far beyond the Patel household or what might happen in the markets today.

By attacking the RBI and other institutions, the Modi government is creating a credibility crisis for India. We are only days removed from a revision of GDP numbers that, frankly, makes India look like a data manipulator. The impact of a rampaging government will be far greater than what most people imagine. Former RBI Governor Raghuram Rajan said that “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.

Also read: Is RBI’s stature irredeemably undermined after demonetisation and government’s rebuke over PNB?

There is nervousness in the system even though both have valid points of view

Ashvin Parekh
Managing partner, Ashvin Parekh Advisory Services LLP

The government recognises that the RBI is an institution, which requires its autonomy and that it cannot be fiddled with.

That being said, I don’t think the situation is nearly as bad as is being speculated. Conspiracy theories and speculations are as a result of the trust deficit of the citizens of the country, owing to the many news we’re seeing one after another. There is nervousness in the system and even when both the parties have their valid points of view, the nervousness is causing anxiety.

Both the parties should have listened to each other, with mutual respect for the other’s viewpoint. The feud and the following resignation is unprecedented because the levels of anxiety on both ends were on the rise.

Going ahead, the government’s responsibility has increased manifold to fix the system. Not only does the next individual occupying the post must be competent and proper, but they need to ensure the individual knows he/she enjoys full independence.

The government, as well as the next person to become the RBI governor, must try and convince the people, the investors, and the tax-payers that things aren’t as bad. The trust needs to be restored.

Shrill cries about RBI autonomy are unhelpful and intellectually lazy

Mandar Kagade
Financial sector policy consultant 

It is the latter, i.e., Urjit Patel’s inability to work with the ruling dispensation. The narrative spun by India’s financial commentariat is, of course, the former.

There has been a raucous debate concerning the RBI’s autonomy after Viral Acharya, D-G, pushed back against the government’s demands about transferring, among other things, a greater fraction of RBI surplus to the government. But those debates appear to ignore that regulators are, as a matter of law, part of the executive arm of the state; not a co-ordinate arm (like the judiciary).

The “rubber hits the road” reflection of the aforementioned high-level idea is Section 7 of the RBI Act; it lays down, in effect, that (subject to consultation) the central government may direct the RBI (to act in a specified manner) in public interest. Now, reasonable people may disagree over Section 7, but the fact remains the law has been on the books all along  Patel worked with the RBI and later assumed charge as its chief executive. It belies reasonable belief that an erudite scholar and old hand at the RBI would take charge unaware of the full import of Section 7 powers.

Globally, as well as in India, the executive arms of the state are holding central banks accountable, both in their central banking and regulatory capacity. Responsible central bankers ought to navigate those waters by engaging their principals and expressing concerns specifically. Shrill high-level cries about central bank autonomy with the elected arms of the state are unhelpful and intellectually lazy.

By Fatima Khan, journalist at ThePrint. You can follow her on twitter @khanthefatima.

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