In defence of Urjit Patel

The government has overreacted in negotiating its differences with the RBI

The unfolding public falling-out between the Reserve Bank of India (RBI) and the Finance Ministry is post-liberalisation India’s nastiest such rift — that too when the two sparring sides are led by non-aggressive personalities. If Finance Minister Arun Jaitley is non-confrontational, RBI Governor Urjit Patel is scholarly and dignified.

Central bank-government tensions are a common phenomenon. Successive governments have been in provocative situations with the RBI. On each occasion, the individuals involved defused tensions and found durable solutions outside the Section 7 consultation process.

Never used before in the 83 years of the RBI’s history, this process has been initiated for managing intractable disputes in not one or two, but three policy matters. Post-consultations, the government can give written directions to the RBI in ‘public interest’.

The disagreements relate to the RBI’s stringent restrictions on government-run banks whose non-performing assets (NPAs) have grown so much, that the only way of preventing risk spilling from them into the whole financial system is to quarantine their lending. A second source of friction is government’s insistence that the RBI go soft on power companies defaulting on loan repayments.

The third dispute is seigniorage, an eternal conflict. The RBI generates surpluses in the various money markets operations it runs. The RBI transfers part of the surpluses to the government, and with the rest it maintains various reserves to draw from in times of financial instability or contingencies.

The Finance Ministry wants the RBI to reset the formulae so that larger surpluses become free for transfer to the government. Determined moves of the sort were resisted most recently by Governors Y.V. Reddy and D. Subbarao, both ex-IAS and old Ministry hands.

Changing procedures

The long-standing battle escalated in 2015. Differences were so sharp that a substitute for the Finance Secretary was nominated to attend the RBI’s Board meetings. For the first time, an interview with a panel headed by Cabinet Secretary was instituted in the selection process for appointing the RBI Governor. Dr. Patel was chosen through this revamped process. Mr. Jaitley was not a member on the selection committee headed by the Cabinet Secretary or of the Appointments Committee of the Cabinet (ACC). His views were taken onboard informally.

The RBI has in recent years passed on its surpluses in totality to the government, transferring nothing to its own reserves. It is working on a framework that will assess its risk-buffer requirements in a systematic way for determining the transferable surpluses every year.

Still not satisfied, the Ministry has initiated Section 7 consultations for dipping into the RBI’s war chest for ₹3.6 lakh crore. For Ministry mandarins, pressuring the RBI comes easier than raising resources through privatisation or expenditure reforms. Air India’s timid disinvestment plan has failed, as was expected. Its debt is burning holes in government finances. Would plugging those with the RBI’s surpluses serve ‘public interest’? This is political convenience masquerading as public interest.

The RBI is being blamed for the NPAs crisis — though at the height of public outrage over the Nirav Modi scam, the government dragged its feet on filling the vacancy of the Deputy Governor in charge of bank supervision and inspections. Mr. Patel was of the view that after decades of relying on public-sector banking background profiles, the job should be opened to a wider, global field of expertise. The panel that shortlisted candidates for approval by the ACC concurred with his opinion. Overcoming the IAS lobby’s resistance, applicants who combined exposure to public-sector banking system with experience at prestigious global banks were included in the shortlist.

But the ACC headed by the Prime Minister returned the shortlist, with a demand for more names, forcing re-advertisement of the vacancy and restarting of the process afresh. The previous Deputy Governor had retired in mid-2017. The successor was appointed in June 2018. The position remained vacant for nearly 12 months.

Such impasses accrue when differences, whether of policy or appointments, are framed as a contest for supremacy, limiting space for serious discussion. Feuds are spun in popular discourse as ideological conflicts of homegrown versus ‘imported’ economists. But for the first time, number of IAS officers holding PhDs in economics were shunted out of the Ministry.

Ila Patnaik, Arvind Panagariya and Arvind Subramanian left government. Raghuram Rajan’s messily-handled departure was followed by the sacking of a member, Nachiket Mor, from the RBI’s central board, another first for the RBI. When the government places low premium on qualified economists, non-technical actors and busybodies are able to muddy the waters and set the agenda.

In the public interest

The Section 7 process has been initiated in issues that were settled in the past without so much bad blood. The government has overreacted and exhibited poor timing. Public interest is hardly served by the initiation at a time of mounting macroeconomic stress. The RBI is a systemically vital institution that, barring its meek acquiescence on demonetisation, commands the confidence of the markets and the public’s respect. What it does not have in good measure is the government’s trust and support.

Puja Mehra is a Delhi-based journalist

 

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