Urjit Patel’s Exit is Another Sign of Modi's Limited Faith in Institutional Guidance

The Wire
By Professor  

The resignation of Urjit Patel as RBI governor is a major setback to the international credibility of India’s apex financial institution, the Reserve Bank of India (RBI).  

At the same time, this act of protest by Patel leaves behind a mixed picture with regard to India’s macro-economic scenario, a troubled public banking sector, a volatile rupee and widening deficits.

After Raghuram Rajan, Arvind Panagariya and Arvind Subramanian, this is the fourth occasion (in less than four years) that a top-notch economist has stepped down or left a crucial post involving, in some capacity, an advisory role to the Centre.  This, of course, excludes a number of other mid, lower-level bureaucrats who were either let go or resigned from their posts as well.

What is clear from the pattern of exits seen are two things. First, top members of the current government possess either a confused or flawed understanding about the craft of economic policymaking.

Second, with this limited applied knowledge of economics and policymaking, government machinery seems to acknowledge only unconditional loyalty as a value-service from its econocrats. It consequently refutes any advice or measure that comes to its power as appropriate checks and balances from institutions like the RBI, that are present for that exact same purpose.    

When Subramanian left, it became clear that increasing centralisation in economic decision making is not only crowding out talented intellectual minds from India’s policymaking environment, but is also destroying the credibility of financial institutions.

Government-sourced data too remains under critical scrutiny and a high degree of academic skepticism from all corners at this point. The recent controversial debate on issues surrounding the released GDP back series data remains a case in point.

What remains troubling to see is how, going up to the elections, there is limited faith now in some credible institutional guiding force that can autonomously function to restore (and increase) investor confidence in a fragile economic landscape.

This includes managing the current macro-economic vulnerabilities by addressing the state of credit-lending in the public sector banking system, ensuring criminal action against bank loan defaulters (as per the IBC requirements), managing a volatile rupee, tackling the rising current account deficit, and more importantly, keeping inflation low.

As a matter of fact, in retrospect, keeping inflation low in times of macro-turbulence and political uncertainties will qualify as one of the major legacies of the Patel-Rajan governorships at the RBI (2013-2018).

During their time, from 2013 to 2018, if we look at the annual consumer price inflation rate (Figure 1 below), the figure fell to around 3.3% in October 2018 (under Patel) from being above 11% in early 2013 (when Rajan became the RBI governor).

Source: Author’s Calculations from World Bank Data

Source: Author’s calculations from World Bank Data

Correspondingly, provisional inflation rates for rural and urban areas have now been brought down to 2.82% and 3.97% in October 2018. As part of the discretionary action from the RBI’s monetary policy tool-kit, keeping short-term interest rights at a consistent, standard pace without giving in to the mounting pressures from the corporate industry (and the government) – i.e. in lowering the rates for facilitating cheap lending options – allowed the RBI to maintain a lower consumer price inflation (and food prices).

Now, with Patel gone, it is crucial to see how consumer inflation levels are managed by the Monetary Policy Committee. A higher level of inflation, particularly at the consumer level, is likely to negatively affect real incomes (purchasing power of people across income groups) and increase distress amongst low- and middle-income groups.

With a volatile currency and higher inflationary expectations, if deficits both on the government and trade side continue to widen while accommodating for external factors such as lowering of oil prices and India’s own economic relationship with US and China, the next few months are crucial for India’s economic performance.

The other key aspect that needs to be monitored (in months to come) is the extent to which the government may try to softly dilute deterrence measures prescribed under the objectives of the Indian Bankruptcy Code (IBC), especially against corporate loan defaulters.

With Patel’s exit, it would be interesting to observe how much effort the RBI’s new leadership takes in pushing for IBC measures while structurally re-adjusting debt-ridden public sector banks. Enforcing contracts and ensuring settlement of corporate-related bankruptcy matters (via IBC) are two major challenges affecting the ease of doing business across states.

The RBI, under Patel-Rajan tenures, was working hard to address the latter issue by ensuring financial discipline amongst borrowers and creditors. However, a look at the situation and numbers now doesn’t evoke much hope for greater financial and general discipline. 

Deepanshu Mohan is assistant professor of economics at Jindal School of International Affairs, O.P. Global Jindal University.