The story that culminated in RBI Governor Urjit Patel's resignation probably began the day when the Modi government decided to appoint S Gurumurthy to the RBI's board. The swadeshi-spouting chartered accountant who believed that the RBI "has lost its capacity to think for India", and who had openly blamed it for the economic troubles of India's small businesses, was now going to oversee the central bank's decisions.
It was the first signal from the government that it wanted monetary policy to be tailored to its political needs. It was also a sign that the Modi regime was going to put reforms on the backburner, at least till the Lok Sabha polls. After all, a known critic of international finance had been appointed to the board of an institution that was run by people who had emerged from that very ecosystem.
That was in August. Things came to a head when the government issued directives to the RBI under an obscure rule never before used in the bank's history. The government wanted the bank to explain how it decides its capital requirements. Earlier, the then Chief Economic Advisor, Arvind Subramanian, had argued that the RBI could easily reduce its reserves and handover Rs 3-4 lakh to its sole owner, the Government of India. Now, in its last few months, the Modi regime appeared to be eyeing a nice chunk of the RBI's reserves to spend on vote-gathering schemes.
Insiders said Urjit Patel wasn't pleased with the way in which government nominees on the RBI's board were trying to flex their muscle. His deputy governor, Viral Acharya, made this irritation public in a speech that went viral, warning that governments which make "inroads into central banking apparatus and decisions" could incur the "wrath of the markets". The Mumbai grapevine began talking about a more open revolt with the possibility that the Governor could even resign.
Although the government didn't respond to Acharya's speech, the Department of Economic Affairs secretary, Subhash Chandra Garg, made a clear allusion to it a fortnight later, when he tweeted "Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?" Around the same time, Gurumurthy gave a speech where he hinted that the RBI's tough lending norms were meant to keep the IMF happy.
What was at stake weren't just the technical issues of central bank reserves and capital adequacy ratios of commerical banks. The bigger issue was of credit flows to India's small and medium businesses (Micro, Small and Medium Enterprises or MSMEs). During the Modi years, bank credit to MSMEs has dropped from 4.2% of GDP in 2013-14 to just 2.8% of GDP in 2017-18. Worried about possible defaults and bad loans, government banks have preferred to fund non-banking finance companies (NBFCs), who in turn give loans to small entrepreneurs. Ever since the IL&FS fiasco, banks have stopped funding NBFCs too. This has caused a huge problem for small businesses, who have found it difficult to raise money to fund their working capital requirements.
Remember that small and medium traders and entrepreneurs have traditionally formed the backbone of the ruling party. Demonetisation and GST had already hit their businesses. The sudden drying out of credit, even from non-banking sources made matters worse. The unhappiness amongst its traditional support base must have climbed up the party's feedback mechanism. Gurumurthy's appointment was partly aimed at easing credit-flows to small entrepreneurs. But the RBI wasn't ready to play ball. It warned that easing lending norms could create another bad loan problem, to add to the Rs 10.3 lakh crore NPA crisis that it was trying to fix.
Gurumurthy, however, believed that these tight-norms were meaningless for a country like India, where businesses depended on banks for their finance needs, unlike developed economies where most entrepreneurs tapped the stock markets to raise capital. The government pushed RBI to provide a special liquidity window for NBFCs so that they could provide finance to small businesses.
Mediators tried to broker peace between the RBI and the government and it appeared that a truce had been worked out at that board meeting on November 19. The nine-hour long marathon meeting, which is believed to have started with heated exchanges between the two sides, ended with the RBI agreeing to a certain set of demands. It agreed to review policies that determine what reserves it will hold and promised to work out a mechanism to restructure loans up to Rs 25 crore. More decisions were to be taken at the next meeting scheduled for December 14.
But just four days before that, Urjit Patel resigned, citing personal reasons. In his characteristic style, he left without making his grievances public. What he left unspoken was said by his predecessor Raghuram Rajan who warned that the RBI governor's resignation should be seen as a "note of protest". He also warned that the "extreme change" through which the RBI board was being given more operational authority "violates the principle of how the RBI used to operate and should operate."
Rajan's statements are likely to fall on deaf ears. The government has clearly decided to push through a more populist monetary agenda right now. The next RBI board meeting on Friday could well see a larger de-facto takeover by the board. What is equally important is that it could signal an official end to India's 27-year tryst with global economic integration. After all, PM Modi's man on the RBI board, S Gurumurthy, has openly said "globalisation is now a matter of past (sic.)".
(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels. He now anchors Simple Samachar on NDTV India.)
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