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Mumbai: Reserve Bank of India governor-designate Urjit Patel is a man of few words. In his 43 months as deputy governor at the central bank, he has given one interview and delivered about two public addresses. Nevertheless, academic papers that he has authored and his interventions at RBI’s post-policy conference calls point to a man who is committed to the cause of low inflation and a critic of excessive government spending.

Mint trawls through his papers and speeches to bring you a snapshot of Patel’s views on policy-related topics.

ON INFLATION AND INFLATION EXPECTATIONS

As the architect of India’s new monetary policy framework, Patel believes that monetary policy should be rule-based. In a paper written with Gangadhar Darbha (who later became an adviser to the central bank), he criticized the lax approach of policymakers towards combating inflation.

“A senior (and serious) official earlier this year described six percent annual inflation as ‘comfortable’ and ‘quiet acceptable’—comfortable and acceptable to whom? Is the suspension of long-standing sound, conservative, inflationary targets temporary, or, is this the new ‘normal’? Answers to these questions aside, what is clear is that persistence of elevated inflation is agreeable to some policymakers. The authorities want to take credit for India’s growth performance but stay blameless on the price front—a case of heads I win, tails you lose! Is there a reluctance to admit that the Indian economy has crossed its ‘speed limit’, but growth is being prioritized over price stability? Answers have been scarce."—Dynamics of Inflation Herding: Decoding India’s Inflationary Process by Gangadhar Darbha and Urjit R. Patel, Global Economy & Development, 2012.

In the same paper, he was particularly harsh on then RBI governor D. Subbarao’s statement that India is a vast, heterogenous country, thus making inflation targeting difficult.

“This is an astonishing series of nihilistic statements—unassisted by evidence or even a hint of scientific thoroughness—from the central bank head pleading either hopelessness on account of India being a large and diverse Federal entity, or, a form of muddled eclecticism."

Patel believes that sustained low inflation, which anchors inflationary expectation at a low enough level, is an important ingredient in making the cost of capital “apposite".

“It’s not inflation last week or last month. It is medium- to long-term inflation because we are talking about long-term cost of capital."—Why The Cost of Capital is High in India? 18 September 2015 speech at India Economic Convention.

ON LIQUIDITY AND MONETARY POLICY TRANSMISSION

“Monetary policy transmission encompasses the whole continuum of interest rates; of course, the central bank only determines the overnight policy rate. And a well-functioning transmission should at some point go from the overnight right up to 40 years and that is the ultimate objective in having monetary transmission that affects the whole gamut of borrowing tenure." —9 August 2016, post-policy conference call with analysts and researchers.

Patel believes that instruments like the statutory liquidity ratio (SLR), where banks have to invest a portion of their deposits compulsorily in government bonds, pose a threat to monetary transmission.

“SLR should be reduced to a level in consonance with the requirements of liquidity coverage ratio (LCR) prescribed under the Basel III framework."—Report of the expert committee to revise and strengthen the monetary policy framework, January 2014.

“We show that the SLR requirement can completely invert the monetary transmission mechanism: a reduction in the policy rate can end up raising lending spreads and thereby cause a contraction instead of an expansion in the economy. Effectively, a binding SLR requirement removes all substitutability between bank assets: banks are forced to keep loans to the private sector and to the government in fixed proportions. Consequently, the reduction in the deposit base that is induced by a fall in the interest rate then forces a reduction of loans to the private sector as well."—Challenges of Effective Monetary Policy in Emerging Economies by Amartya Lahiri and Urjit R. Patel, RBI working paper, December 2015.

ON FISCAL POLICY

Patel has been a trenchant critic of subsidies and excessive government spending. The report of the committee that he chaired emphasized the need for fiscal discipline several times.

“The fiscal situation also severely circumscribes exchange rate management by the Reserve Bank of India as an instrument of strategic commercial policy. Even more worrisome, and a source of considerable uncertainty for the nation’s public finance, is the impending expansion of entitlements, both explicitly for food and implicitly for petroleum products. Furthermore, there has been excessive reliance on monetary policy in the absence of the requisite fiscal retrenchment in the fight against inflation."—Regaining Fiscal Credibility in India by Urjit R. Patel and Vijay L. Kelkar, Brookings op-ed, 15 February 2012.

A 2006 paper he co-authored argued that India was paying an especially heavy price for its fiscal excesses because the standard financial crowding-out by government borrowing is intensified through government-created distortions in the financial system.

“Fiscal virtue cannot be legislated. It must be implemented and enforced—it must be incentive-compatible even for myopic and opportunistic governments. Unless India discovers a way of tying its fiscal Ulysses to the mast, the siren song of fiscal retrenchment tomorrow but fiscal expansion today will continue to lead policymakers astray." —Excessive Budget Deficits, a Government-Abused Financial System, and Fiscal Rules by Willem H. Buiter and Urjit R. Patel, India Policy Forum, 2006.

That is a theme he returns to in a 2010 paper as well, highlighting the “sorry fate of fiscal responsibility legislations in most other parts of the world".

“It is hardly prejudicial to conclude that fiscal virtue cannot be legislated without thoughtful mechanism design that renders its practice incentive-compatible. On the other hand, since a general government debt-GDP perspective may be incorporated in India’s prospective macroeconomic management approach, it may be possible to have an incentive compatible framework with an inbuilt carrot-and-stick strategy that brings in the judiciary and thus integrates the central and state governments in a manner that holds them credibly accountable and, more importantly, rewards and punishes (enforces) each other’s fiscal performance." —Fiscal Rules in India: Are They Effective? By Willem H. Buiter and Urjit R. Patel, National Bureau of Economic Research, April 2010.

ON BANKING IN INDIA

“Banks may have to revisit at an opportune time (not now) in due course (that is, in the future) the individual company/group credit exposure limits, as well as sector exposures as part of their learning for the future for better risk management practices over the business cycle.

“We should redefine the metric for effective lending, viz., prioritise loans to enterprises which will generate more employment. (Corollaries would be) a much larger number of small business loans will be encouraged rather than an overriding emphasis on very large loans per se... In the context of discussions on priority sector policy/guidelines, finance for small entrepreneurs, SMEs and employment creation may be reinforced." —12 January 2015 speech at Business Standard Best B-School Project Awards.

“Government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions." —Report of the expert committee to revise and strengthen the monetary policy framework, January 2014.

“The higher the cost of restructuring, more is the cost of capital from the side of the lender." —Pointing to the need for faster debt restructuring at banks in Why the Cost of Capital is High in India? 18 September 2015 speech at India Economic Convention.

ON JAN DHAN YOJANA AND AADHAAR

“The Jan Dhan Yojana scheme implemented almost wholly by our public sector banks, whereby 100 million bank accounts have been opened for those who were unbanked, is unequivocally a ‘game-changer’. It provides an unprecedented scaffolding and a spring board for meaningful financial inclusion and, concomitantly, substantial financial deepening of our economy." —12 January 2015 speech at Business Standard Best B-School Project Awards.

“One form of expenditure growth mitigation could be a phased expansion in entitlement coverage so that the impact on the budget is spread over several years. Over time, Aadhaar—under implementation by the Unique Identification Authority of India—through better targeting should help to plug leakages and assist expenditure control." —Regaining Fiscal Credibility in India by Urjit R. Patel and Vijay L. Kelkar, Brookings op-ed, 15 February 2012.

ON THE ROAD AHEAD for THE RESERVE BANK

“For the central bank, the tasks ahead are two-fold. First, perhaps re-balance the reform agenda from high profile subjects such as legislative amendments, like a monetary policy framework and associated institutional changes, to addressing policy-induced distortions that undermine monetary policy efficacy and transmission. Second, address the challenge of multiple roles/objectives and limited instruments."—Challenges of Effective Monetary Policy in Emerging Economies by Amartya Lahiri and Urjit R. Patel, RBI working paper, December 2015.

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