Despite the laudable initiatives he took to fix the bad loans problem, the sudden exit of Reserve Bank of India (RBI) governor Urjit Patel is, on balance, a positive development. It may have been badly timed and will cause the Modi government a lot of embarrassment, but Patel was simply not the man for the job.
Any RBI governor needs two skills. One is the ability to communicate, including with the finance ministry, so that the relationship is smooth despite disagreements. The other is the ability to take policy decisions keeping the complexities of the real Indian economy in mind. Patel failed to measure up on both counts.
This was evident in the early days of his governorship, when demonetization overshadowed his entry to the top job on Mint Street. He remained tongue-tied and under-communicative when the public and the markets needed reassurance. The government’s critics saw Patel as a Modi flunkey, a willing accomplice to the devaluation of the RBI’s credibility. However, with 20/20 hindsight, it is clear that Patel was, and is, a bad communicator, so bad that he let his relationship with the government deteriorate to the point of distrust.
One need not absolve the finance ministry of responsibility for this development, but a larger share of the blame, which resulted in the government having to invoke section 7 of the RBI Act to force the governor to listen to its concerns, must be laid at Patel’s door. At the end of the day, the governor has to convince the government— the owner of the Reserve Bank—and the RBI board why he is doing what he is, not the other way around. He cannot act in isolation, without accountability. One can talk about RBI’s independence being compromised, but we must balance this with the fact that the government gave it additional powers to deal with the bad loans problem, by inserting sections 35 AA and 35 AB in the Banking Regulation Act. This is what helped several steel and cement assets to be sold to more solvent bidders, with the haircuts for banks being moderate in some cases.
In any event, independence is not something that is conferred on a regulator; it is negotiated and earned. Governor Patel did not earn it and, if he had any hand in getting deputy governor Viral Acharya to publicly attack the government a few weeks ago, he was setting himself up for failure. When you challenge the government so openly, accusing it publicly of attempting to raid the RBI’s capital, it invites a pushback. Now that Patel himself is gone, one can presume that the remaining tenure of Acharya may also be in some doubt.
It is worth recalling that two of the most contentious issues between the government and the RBI predates the current spat. The previous chief economic advisor, Arvind Subramanian, told the RBI last year that its inflation forecasts were consistently overestimated. He also claimed the RBI had excess capital of around ₹ 4-4.5 trillion, some of which could be used to recapitalize public sector banks, with conditions attached.
The RBI’s poor record in estimating inflation is now established fact, but there was no contrition, no mea culpa, when last week’s monetary policy announced sharp reductions in retail inflation projections for the second half of this fiscal and the first half of the next. This implies that the one major achievement we credit Patel and the monetary policy committee (MPC) for—moderate to low inflation—had almost nothing to do with monetary policy. Patel’s MPC was fighting an imaginary battle against inflation. This was demonstrated as early as February 2017, when the MPC wrongly shifted its policy stance to neutral from accommodative; even today, when inflation is so low, the MPC is stuck on “calibrated tightening." Patel seems to have a weak understanding of the realities of Indian inflation. The higher-than-needed interest rate regime is hurting an economy grappling with a double balance-sheet problem.Urjit Patel probably had his good points. He did good work as deputy governor under Raghuram Rajan. However, he did not make a good governor.
The top job needs more than just some academic qualifications and a doctrinaire approach to policy-making. It needs a man who can carry his political bosses along in his drive to do his best for the economy. It needs someone who can differentiate between the demands of the financial markets and that of the real economy. Patel didn’t get that. He misunderstood India and its political economy at a time of great economic disruption.
R.Jagannathan is the editorial director, Swarajya magazine