This Article is From Dec 10, 2018

With Urjit Patel's Exit, Team Modi Delivers A New First

Narendra Modi promised us that his would be a government of firsts, and he has certainly delivered. Not once in the post-liberalisation years of India's rise has the governor of the Reserve Bank of India had to resign. Urjit Patel may have declared that he is resigning for personal reasons but the timing of his departure is revealing: it comes just days before the RBI Board was due to meet to consider "governance reform" of the central bank, a polite euphemism for greater control by the central government.

urjit patel

Urjit Patel resigned as RBI Governor today amid growing differences with the government over a range of subjects including the central bank's autonomy

I remember that when candidate Modi was barnstorming through India in the months before his landslide election as Prime Minister, many liberal intellectuals argued that India's institutions were strong and independent, and could therefore serve as a check on any Prime Minister's ambitions, even the sort of Prime Minister Modi promised to become. Patel's departure is just one more example of how detached from reality were such pronouncements.

The independence of the central bank is a hard-won achievement in India. We have too few such world-class institutions. The RBI's reputation was badly damaged by its supine acceptance of demonetisation in 2016, but to Patel's credit, he has worked hard since then to repair its image. Now, at one stroke, we are back in a pre-1991 world in which, as in any banana republic, the government can order the central bank into line.


The government reportedly wanted to use the provision to control lending rates and also get its hands on reserve cash kept in RBI coffers

Why is this dangerous? As Viral Acharya, the deputy governor of the RBI, pointed out a few weeks ago, any subservience of a central bank to the government means that the financial system becomes fundamentally untrustworthy. In the Indian context, it means that the reserves of the RBI, which it relies on as a buffer to manage any future economic crises, would be taken away to finance the government's vote-buying expenditure. It means that the government will be able to run higher deficits without the RBI responding by reducing liquidity and raising interest rates - the best of both worlds as far as a high-spending government is concerned, but something that would mean that India's debt and inflation could balloon out of control. It means that the agonisingly slow clean-up of the banking sector might stall or even be thrown into reverse in order to protect the government's interests and those of the interest groups it wishes to placate through the state-controlled financial sector. And yes, these are things that happen in a banana republic, not in a mature economy and a modern country that aspires to superpower status. A government elected on the promise of finally fulfilling India's aspirations to greatness is taking us backward to the darkness of the 1970s and 1980s. 


Viral Acharya - claimed in a speech on October 26 - that the government's efforts to undermine the central bank's independence would be "potentially catastrophic" for the country

The plain truth is that the Modi government has shown itself to be fundamentally uncomfortable with any institutions it does not control or "manage". When the Rajya Sabha was bypassed to pass legislation like the Aadhaar Act that it should instead have been able to debate and vote on, many made excuses for the government. When a Lok Pal was not appointed in spite of there being legislation enabling it, many said it proved nothing. When the Central Information Commission, charged with safeguarding the Right to Information, began denying requests on the flimsiest of grounds, many chose to look the other way. But when four senior judges of the Supreme Court held an unprecedented and shocking press conference in which they sounded a warning about judicial independence, even the friendliest of voices would have struggled to portray the government as being respectful of India's constitutional structure. When the leadership of the CBI, in a piece of dark comedy, fell to raiding each other and then was sacked en masse, the pattern of interference became clear to even the most jaundiced eye. And now, after a well-plotted and public campaign to undermine the Reserve Bank has caused the resignation of a hand-picked governor, it is evident that not since the authoritarian Indira Gandhi was in power has India had to deal with a government as centralising, as cavalier, as ambitious and as irresponsible as the one we have now.


Former RBI chief Raghuram Rajan also made a case for Reserve Bank autonomy, saying that the central bank is as important as a seat belt is to a car

The allergy to independent thought on display here is not just dangerous for India's constitutional order. It does not just reduce the checks on prime ministerial power that are essential in any liberal democracy, it also means that that power will be poorly wielded. It means that good advice will not just be ignored but not be available. Every well-known economist who could have served as a counter-point to dangerous or foolhardy political instincts has left: Arvind Panagariya, Raghuram Rajan, Arvind Subramanian and now Urjit Patel. You want to know what happens when no independent advice gets through, or is disregarded? You get world-class, historic, Himalayan policy errors - like demonetisation. 


People wait in a long queue outside a bank after high-value notes were scrapped in November 2016 (File)

The worst part, perhaps, is that there is so much still to worry about. The vigilance authorities and the Comptroller and Auditor General have been silent so far - will they be able to stand up and defend the integrity of their offices, or will in time we discover that these too are lost to us? Most worryingly, will the Election Commission continue to be the trustworthy guardian of our electoral process that it has been since T N Seshan? The time to look the other way has passed. It may well be the case that India's economy will survive, in the short term, the departure of Patel as it survived the departure of Rajan. But the long-term hits to the economy and to the emergence of a modern India delivered by the Modi government are adding up. It will not be too long before we collapse under the strain. Can we settle for being a second-rung, also-ran country of the sort we were before 1991? 

(Mihir Swarup Sharma is a fellow at the Observer Research Foundation.)

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