Shaktikanta Das, Narendra Modi’s demonetisation man, has a fresh task at hand: Tame a rebellious central bank

Shaktikanta Das, Narendra Modi’s demonetisation man has been given a fresh task—to tame a rebellious central bank, the top brass of which is on a warpath with the central government.

The resignation of governor Urjit Patel made it quite clear that the speculated truce between the government and the Reserve Bank of India (RBI) was a false assumption; that the differences between the two haven’t passed the tipping point yet. Here is where the appointment of retired IAS officer Shaktikanta Das assumes significance. It was Das, who as the former economic affairs secretary, spearheaded Narendra Modi government’s November 2016 demonetisation programme—a controversial economic exercise which invalidated 86 percent of currency in circulation overnight in search of black money in Asia’s third-largest economy.

Das dominated all press conferences and government communications from Day 1—throughout the tumultuous period of the note ban implementation, he aggressively defended every aspect of it and engaged with the central bank on a daily basis to twist and tweak the cash withdrawal/deposit rules. Often, Das did not mince words while attacking note ban critics who complained demonetisation impacted economic growth. Citing the 7 percent growth in the October-December quarter post-note ban, he said the figures proved demonetisation critics wrong. “An overestimation was done about the so-called negative impact of demonetisation,” Das said.

On the first anniversary of note ban, Das tweeted about the 'significant gains' for the economy on account of demonetisation:

Two years after note ban, Das has been given another task by the Modi government--to douse the raging fire at Mint Road. It is not surprising that the Narendra Modi government needed just about 24 hours to find a replacement for Urjit Patel, who resigned on Tuesday amid an ongoing standoff with the government. The government must have got a sense of what lay ahead post-19 November RBI board meet and must have had a plan B ready. The government obviously wanted a trustworthy bureaucrat who wouldn't turn against it at a critical time especially considering that the government-RBI relations have worsened to a new low.

 Shaktikanta Das, Narendra Modi’s demonetisation man, has a fresh task at hand: Tame a rebellious central bank

File image of Shaktikanta Das. Image courtesy PIB

Since 9 November, when Urjit Patel met Prime Minister Narendra Modi and both reportedly discussed contentious issues, there have been speculations about Patel’s resignation which persisted till the evening of 19 November when the RBI’s crucial board meeting ended.

Although Patel did take another fortnight to make up his mind and put in his papers, there would have been reasons for the government to think of an alternative candidate to fill the governor’s post in case of an unexpected resignation.

From North Block to Mint Street

Like D Subbarao, Shaktikanta Das is moving to the central bank as someone who is familiar with the finance ministry. Das has served long terms in different capacities to understand the pulse of the government machinery.

Whenever IAS officials who have served in the finance ministry were sent to Mumbai to head the RBI, they came with the image of a ‘government’s man. But as former governor D Subbarao once famously said, somewhere along the flight from Delhi to Mumbai, the government bureaucrat transforms into an RBI governor, ceases to be a government man and begins the fight for the central bank.

One needs to wait and see whether Das will undergo a similar transition and take up RBI’s fight for autonomy from the point where Patel left or become an enemy in the camp for the central bank.

With his tremendous experience and as someone who has for long contributed to the preparation of national budgets, Das can hit the ground running as RBI governor. There are multiple challenges that await him. Of them, the biggest issue is the Narendra Modi-government’s demand to transfer a substantial chunk of RBI’s cash reserves so that the government can manage its ballooning deficits and feed the capital-hungry state-run banks.

Second, there is the important issue of RBI’s governance itself—the real standoff between the central bank and the government. The government wants to change the way RBI operates by installing a Board-monitored mechanism. Third, the dilution of the prompt corrective action (PCA) currently imposed on close to a dozen state-run banks. Fourth, the special concession to micro, small and medium companies. The RBI has openly expressed its reservations on most of these demands, but had to agree to some of them in the 19 November Board meeting. On all these issues, whose side Das will be on, will be interesting to watch.

Das is known to have a close relationship with Union Finance Minister Arun Jaitley. His immediate task will be to improve the ties between the Reserve Bank of India and the Narendra Modi-government or, as the government would want, contain the rebellion in the central bank. This will be a trial by fire for Das as most of the contentious issues listed above aren’t resolved yet.

If Das does toe the government line blindly, it will invite the wrath of RBI’s top brass and financial markets. A few more Patel-like resignations cannot be totally ruled out. If he doesn’t, Das will join the long list of RBI governors who have metamorphosised from an old friend-turned-foe for the ruling government, like say D Subbarao. RBI governors often take pride in such a transition and love to be on the wrong side of the government in the eternal battle for RBI’s autonomy.

Das’ challenge is to find a delicate balance that doesn’t compromise the credibility of the RBI and at the same time not worsen relations with the government any further. The million dollar question is, whose side will Das take.

Updated Date: Dec 12, 2018 11:57:29 IST