All’s well that ends well. That is how all public spats between policymakers are supposed to end. Only the prime minister is allowed to win a policy battle between the government and other public institutions. The rest have to learn to live with compromises. So, Reserve Bank of India (RBI) governor Urjit Patel did not resign. That he would not should have been obvious to any experienced analyst the day he called on Prime Minister Narendra Modi. If his intention was to go, that was the day to go. That the meeting ended cordially with governor Patel recognising, like his 23 predecessors over the past 83 years, that the Sovereign is supreme, whatever markets and fund managers may think.
For its part, the government also treated the governor and his team with dignity, making its point without hauling them over the coals despite the extremely provocative and ill-advised speech of the intemperate deputy governor Viral Acharya.
Politically, the government can claim it was fighting a battle on behalf of micro, small and medium enterprises that are struggling to raise funds. A loan restructuring scheme will be launched for small businesses with a credit facility up to Rs 25 crore.
Banks get a breather to bolster their capital. A committee will examine the RBI’s case for retaining more of its reserves than what the government would like it to. Finally, the RBI was willing to be seen conceding a larger role to the advisory board. What happens in practice remains to be seen.
As the dust settles down and the “controversy goes off the front pages”, as a board member put it, the prime minister is likely to admonish all concerned for allowing differences to get magnified and enter the public domain in election season. After all, as has been said by several analysts, this is not the first time that an RBI governor differed seriously with the Union ministry of finance.
During one of former RBI governor Y Venugopal Reddy’s many stand-offs with finance minister P Chidambaram, the FM decided to take his complaints to the prime minister. When the prime minister was briefed on the ‘advice’ given by the finance ministry to the governor, Manmohan Singh asked, “So what did the governor say?” The reply was simple. “Nothing!” Reddy kept his counsel. He heard his interlocutor from the North Block and neither agreed nor disagreed! The meeting ended. A few days later the governor called on the prime minister. The matter was resolved, quietly. The Patel-Acharya team, on the other hand, chose to go public with its views. They should learn to be more circumspect.
The finance ministry, too, overplayed its hand. Economic affairs secretary SC Garg and financial services secretary Rajeev Kumar pushed the envelope with their Section 7 threat. The government at the highest levels is not run like that. Authority must be exercised without it being seen to be.
What are the likely consequences of the resolution of this conflict? The immediate outcomes are on the policy front. The central bank may be less monetarist in its approach to monetary policy, accommodating the government’s fiscal stance in the run-up to an election. The government will be more restrained and not pull out stuff like Section 7 from its dusty files. The members of the board may have to do more homework if they wish to have their views heard and appreciated. Merely asserting their viewpoint is not going to help.
In the medium to long-term, however, the Patel-Acharya duo may have made the officers of the Indian Administrative Service in New Delhi decide that they should have a foot in the central bank, as was in the past.
In fact, a former governor, and a distinguished one that, held the view that in the interests of smooth operation of RBI-GOI relations, there should always be an IAS officer, serving or retired, occupying one of the top jobs at the central bank. Both C Rangarajan and Bimal Jalan benefitted from the presence of YV Reddy, of the IAS, on their team.
Note the fact that of the RBI’s 23 governors, only a handful had never served in New Delhi before their appointment to the top job. Even the ones who did not serve in the government of India had fairly lengthy tenures within the central bank.
When D Subbarao’s first term as governor was coming to an end in 2011, a senior colleague of the then prime minister Singh suggested that Raghuram Rajan be invited to India and made the governor. Singh was very clear in his mind that Rajan should serve a tenure as either a deputy governor or as the chief economic adviser (CEA) before being appointed the governor. Rajan wisely opted for the CEA’s job, even if for a year, knowing perhaps that a stint in New Delhi would be helpful once ensconced in Mumbai. However, his exit in 2016 may well have been a consequence of his forgetting that the buck stops with Raisina Hill.
Both business and the markets expect the government and the central bank to impart more dynamism to the economy. While injecting more liquidity is one of the many solutions, equally important would be an efficient management of policy. The recent standoff will hopefully encourage governor Patel to be more communicative, infusing greater confidence among investors.
(The author is a political commentator and policy analyst. He tweets at @barugaru)
Updated Date: Nov 22, 2018 07:25 AM