Urjit Patel stands tall among predecessors with his final act; but his silence on note ban triggered the unmaking of RBI

Urjit Patel isn’t the first Reserve Bank of India (RBI) governor who has resigned before his term over differences with the incumbent government. There have been a couple of instances in the past too in RBI’s 83-year old history when governors have stepped down to protest their displeasure against the government. There were at least three who resigned in this manner. But none compare with Urjit Patel’s final act.

The other resignations were over differences on interest rate management and policy approach but what differentiates Patel from his predecessors is that he sacrificed his job not for policy differences but to make a last-ditch bid to save the very institution itself. For this reason alone, Patel stands tall among his predecessors in RBI’s history. Posterity will remember him for this.

Still, Patel can’t be termed as one of the best governors of RBI. His communication skills left a lot to be desired. ; he was a bad communicator. Markets had to often guess his mind. On a few crucial occasions when he really needed to speak up, he remained silent. Prime example, being demonetisation. Having pointed these out, there are some are important things to his credit. Patel is the chief architect of India’s retail inflation-centred monetary policy. Similarly, he played a crucial role in carrying forward the NPA-clean up process his predecessor Raghuram Rajan started.

His biggest duty, however, was waiting for him yet--to safeguard the institution itself. Perhaps, Patel would have thought that it is better to bid goodbye rather than witness the death of an institution under his governorship. The weapon released by Patel aiming at North Block is irreversible and has already done considerable damage to the government since no amount of political spin can explain Patel’s abrupt resignation.

With his resignation, Patel has escalated the threat the RBI faces from the government before the world; this will mean government and its nominees on RBI’s board will have to instantly put a stop to all attempts to snatch away power from the institution.

Even a minor provocation can escalate things to an even higher level. Remember, Viral Acharya, the deputy governor who spearheaded the attack from RBI’s side has not resigned yet. Post-Patel’s resignation, there were rumors of this happening. If the government provokes the central bank further, this may well happen. The government wouldn’t want to worsen things to that level. With his final act for RBI’s sanctity, Urjit Patel, one of the most reclusive of RBI governors, stands taller than all of his predecessors.

Low key official to RBI hero

Patel wasn’t always like this. As the RBI governor, he was nowhere in the picture when Modi announced his decision to invalidate Rs 500 and Rs 1,000 notes on 8 November 2016. This is despite the RBI being the authority of currency printing and circulation. Patel’s job was only to implement what was essentially a political decision. And, due to the sheer size of the programme (86 percent of currency in circulation was withdrawn at a short notice), Patel and his team at the RBI failed miserably to ensure smooth implementation of the note ban. The hardships for the public went on for several months. India’s economic growth story suffered greatly on account of demonetisation. Informal sectors took a heavy beating. Unemployment rose. Note ban failed to achieve most of its originally stated targets, viz, killing black money and fake currency.

File image of RBI governor Urjit Patel. Reuters

File image of RBI governor Urjit Patel. Reuters

Not once did Patel speak up against the programme even as most economists around the world and in India criticised this most disruptive economic move. This included a few of Patel’s former colleagues in the RBI who pleaded openly to arrest the unmaking of the RBI. Demonetisation was trial by fire for Patel and his first big challenge after taking charge as governor. But, both on communication and implementation, Patel failed that test. Had Patel spoken up when demonetisation was announced or had resigned then, his stature would have gone up even higher.

Things changed post-note ban. The government thought of, and treated, RBI as one of its divisions and began to push it even further. Fresh issues came up such as lack of powers with the central bank to regulate public sector banks. At this point, Patel realised things were getting out of hand and decided the RBI would have to confront the efforts to snatch power from it and not remain a silent spectator any longer.

Viral Acharya, one of RBI’s deputy governors, was fielded to take on the government publicly, which he did very well in his public speech. The list of demands from the government from the RBI only grew. Of them, the major one was a demand for RBI’s cash reserves.

The government desperately wants this money (it is pushing for it even now and has managed to convince RBI’s central board to form a committee to discuss this issue) to bridge its widening fiscal deficit and keep ailing state-run banks afloat. Besides, there were other issues such as dilution of RBI’s prompt corrective action (PCA) on 11 state-run banks. Again, this was against RBI’s action plan to clean up the NPAs in the banking system. These banks were put under PCA on account of serious ill-health of their balance sheets and operational inefficiency. RBI was also pushed to sacrifice its power as payments regulator and relax norms for lending to MSMEs. Many of these issues came for discussion in the 19 November board meet and RBI had to agree to most of the government demands. Such as situation would have made Patel think of his final act.

For the most part of his stint in RBI, Patel always kept a low profile and wasn’t very visible to the public as opposed to his predecessor, Raghuram Rajan. In fact, he was seen as a big departure from the eloquent, aggressive and to an extent, confrontational Rajan. In other words, Patel was considered to be the kind of man the government always wanted in office--someone who would keep his head down and work silently, someone who wouldn’t talk beyond what is required by his pay-grade and more importantly, someone who wouldn’t confront and become a daily headache and embarrassment to the ruling government. Patel entered the scene as just the right fit for North Block.

Ironically, from being the reclusive, low-key government’s favourite at one point, Patel turned into its biggest challenger in recent times. This is the first explicit resignation by an RBI governor for the cause of RBI’s independent existence and credibility. One must note that even in his exit, Patel showed grace with no direct attack on the government by cleverly avoiding any mention of the government in his resignation letter, leaving the public to read between the lines. This was the final option and perhaps the only option left to Patel to save the institution from turning into a puppet of the government.

That an RBI governor was forced to resort to this final act is a matter of disgrace to India. The government has hopefully got the message and learnt the lesson the hard way. It should let the RBI do its job with the required autonomy at least after Patel's exit.

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Updated Date: Dec 11, 2018 13:54:07 IST

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