The RBI Governor’s resignation reflects a revolt against Modi regime’s attempts to tamper with the autonomy of the central bank. And there’s more
Urjit Patel was the Narendra Modi government’s chosen man to lead the Reserve Bank of India. It was under Patel’s watch, Prime Minister Modi implemented his disastrous demonetisation of high value notes in November 2016. Patel looked a happy man then, who had defended the move, which was opposed by several economists and state legislators. Patel even termed the note-ban “well planned”. But that was then. The Central Bank Governor was increasingly getting uneasy with the government’s repeated attempts to interfere with the RBI’s autonomy, especially in the past few months.
To be fair, tensions between the Centre and the RBI are not new in India. However, skirmishes between the Modi government and Patel-led RBI had reached so high that one of his deputies, Viral Acharya had once publicly warned that compromising the central bank’s independence could be “catastrophic”.
It’s against the backdrop of this hostile atmosphere that Urjit Patel announced his resignation on Monday.
The recent crisis unfolded after an Allahabad High Court recently ordered that the government could consider giving directions to the RBI under Section 7 of the Reserve Bank of India Act, 1934. The High Court gave the order while hearing a plea filed by independent power producers against the Central Bank’s February 12 bad loan circular (it tightened norms for bad loan resolutions, asking banks to set deadlines to resolve large bad loans and even invoke insolvency proceedings against those who fail to repay debts). Under Section 7 of the RBI Act, “the Central government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest”. But no government has invoked this section in RBI’s 83-year history.
But, following the HC order, the government issued a letter to Governor Patel seeking his views on exempting power companies from the ambit of the bad loan circular. Further, the government asked for the Governor’s views on using the Central bank’s reserves for liquidity and then ease some regulatory restrictions. The regulatory restrictions are about the Prompt Corrective Action (PCA) mechanism. The government wanted the RBI to transfer Rs.3.6 lakh crore of its reserves —more than a third of the total Rs.9.59 lakh crore reserves — to the government. The finance ministry suggested that this surplus can be managed jointly by the RBI and the government.
Where’s the money, honey?
The recent collapse of Infrastructure Leasing and Financial Services Ltd (IL&FS) has triggered a liquidity crisis, especially among the non-banking financial companies (NBFCs). This has a chain effect. The crisis in NBFC will squeeze lending to small and medium enterprises, which in turn will hit job creation. So the government wanted RBI to ease the PCA mechanism so that banks can lend to small businesses.
The RBI found these suggestions as the government’s interference in its autonomy. It particularly resisted the government attempt to dip into its reserves as it believes such a move will impact macro-economic stability. On its November 19 board meeting, the Central Bank decided to set up a high-powered committee to look at both issues—management of surplus capital and easing regulatory curbs for lending. Then came Patel’s decision to step down as RBI Governor, citing personal reasons. It’s evident from the way the Governor stepped down that the government continues to interfere with the Central Bank.
There are two takeaways from Patel’s resignation. One, the government’s insistence on dipping into the RBI’s reserve and the bank easing regulatory restrictions suggest that both its finances and the credit market are weak. The roots of the crisis could be traced back to demonetisation which wrecked the backbone of the small scale industries. Two, bureaucrats, who sang government tunes till now have started suddenly speaking out against the policies of Prime Minister Modi.
Chief Election Commission OP Rawat had recently said that Modi’s demonetisation did not have any impact in checking black money. Arvind Subramanian, the former chief economic adviser, said demonetisation was “a massive, draconian monetary shock”. RBI’s Acharya warned of a catastrophe, slamming the government. And now, Patel has quit resisting the government’s efforts to interfere with RBI’s autonomy. Towards the end of its term, the voices against Modi are getting thicker.