Reserve Bank of India (RBI) governor Urjit Patel has worked up a perfect storm. The stock market has been hammered. FPIs have flown the coop. Employment is dithering. Realty and automobile markets, that were once booming, show enthusiasm only in unrealistically bright ads. There is a liquidity crunch in the economy. None of that is good news in an election year. The government needs to boost spending and is telling the central bank to do that. The RBI has the monetary tools and a lot of money in its reserves but will not oblige. The result: an ugly, public face-off with the finance ministry.
That is why rumours of Patel’s possible resignation when the RBI board meets next on November 19 are difficult to dismiss. And to think that he was the chosen central bank chief after the government decided not to do any more business with Raghuram Rajan. Patel had all the credentials to be there. Not just his education. He had the performance on record as Rajan’s inflation warrior-in-chief to be the right man for the job. And if conspiracy theorists were to be mollified – he was Gujarati too. The signs were all there that it would be plain sailing for him right through his tenure. A little over two years into his job, during which he backed demonetisation, there is no certainty how long he will survive even if the present storm blows over.
Being a central banker can be tricky business anywhere in the world. When Paul Volcker was the Federal Reserve chief during the Reagan administration, he once had a face-to-face with the US president who – the advance party suggested – wanted to tell him how to do his job. Despite the uncomfortable start, that meeting was eventually less prickly than was expected because Volcker handled it with tact.
Patel, reclusive and retiring, but now also showing evidence of steel, has reportedly kept the battle even. But history says that the RBI governor rarely walks on a bed of roses. It also says that when the going gets tough, the tough need not necessarily be allowed to get going at the central bank.
Former prime minister Manmohan Singh, who was RBI Governor between 1982 and 1985, said about his relations with the government in an interview for a book: “There is always give-and-take. I had to take the government into confidence. The Governor of RBI is not superior to the finance minister in authority. And if the finance minister insists, I don’t see that the Governor can really refuse unless he is willing to give up his job.”
Now read the statement that the government issued earlier this week as the war of words between the two sides escalated to the point that it was being discussed abroad. “The autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement,” the statement said – no alarm bells going off there. Then quickly came the choke hold. “Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy,” the statement said. So public interest it would be, and as anyone can say, an elected government in a democracy rather than the country’s central bank would have the whip hand in deciding what is the public interest.
Deputy governor Viral Acharya who has been presenting the RBI’s position on the issue said recently about the central bank’s role: A government’s horizon of decision making is rendered short, like a T20 cricket match, by considerations such as national and state elections, and populist alternatives acquire urgency. A central bank, by contrast, plays a Test match, trying to win each session of a day’s play but importantly, also to survive so as to have a chance to win the next session.
Patel, though, should not feel despondent because other, sometimes more illustrious RBI governors than he, have been where he is now. And it started right after independence in the confrontation between finance minister TT Krishnamachari and RBI governor Benegal Rama Rau who held the post between 1949 and 1957. The two had a running battle. Rama Rau, an ICS officer and a man with impeccable credentials but less voluble – like Patel – held his ground for as long as he could. The last straw, though, was one meeting at prime minister Jawaharlal Nehru’s chamber. It was held to bring down tempers but had quite the opposite effect on Krishnamachari, who came out of the meeting and berated the governor. It was to prove to be the reason for Rama Rau’s exit with Nehru apparently asking the country’s central banker to send his resignation to the very finance minister over whom he was quitting.
There are a few variables in the equation now which make it difficult to get an answer to the question whether Patel will stay to fight another day or go. There has been enough noise over the handling of the affairs in the Central Bureau of Investigation, the country’s premier investigation agency. So will the government go for the axe at RBI and suffer some more damage to its reputation? For a start, the Modi government has not been known to bother much with niceties like public opinion and opposition and media reaction if it can see the road ahead – and in this case it seems it can. But, this is an election year and as anyone will say, it takes just a flap of a butterfly’s wings at one place to create a storm in even time somewhere else. And no one knows if that flap of a butterfly’s wings will be at the RBI headquarters in Mumbai, the CBI headquarters in the national capital or somewhere else. It is time for both sides to take measured steps.