Demonetisation: Urjit Patel is an 'extra' in the PM Modi show until govt needs funds

All India bank officers confederation, which claims to have representation from 2.5 lakh officers across banks, has demanded Reserve Bank of India (RBI) governor, Urjit Patel’s resignation taking the moral responsibility of the havoc caused to the economy with the unprepared decision on demonetisation.

Demonetisation: Urjit Patel is an extra in the PM Modi show until govt needs funds

Urjit Patel, Reserve Bank of Governor. Reuters

Well, it is nonsensical to bay for Patel’s blood. First of all, Patel and the RBI had very little role in this whole demonetisation exercise. The demonetisation wasn’t an RBI idea from the beginning. It was a political decision. Except at a presser on 9 November alongside economic affairs secretary Shaktikanta Das, Patel has never appeared in public to talk on demonetization. Similarly, except issuing a few press releases, the RBI hasn’t held any pressers to explain the cash situation in the country even after 13 days of confusion and panic among the public.

A political necessity for Modi, of course

As mentioned in an earlier article, Modi sensed the bigger opportunity in taking personal responsibility of the gigantic move against black money. Once the pain-days are over, the move will surely be seen as a landmark reform ever undertaken in the independent India to unearth black money from the financial system after the 1978 currency crackdown by Moraji Desai government.

Even more so, given the fact that Modi had to prove that he is doing what he promised on black money in the run up to the 2014 general elections. The effectiveness of demonetisation to tackle black money effectively is a matter of debate, no one will dispute the government’s intention. Modi’s previous attempts to recover black money through two separate amnesty-like windows, one in 2015 and the other concluded in last September — cannot be termed as a big success since the amount of money recovered from these operations were either too small, or way below expectations.

The government managed declarations worth Rs 4,147 crore from foreign black money holders in the first round and in the second, Rs 65,250 crore. But, the currency crackdown doesn’t leave any room for criticism as far as the government’s intention is concerned, excluding the implementation part. The point is besides the black money hunt, demonetisation was also a major political necessity for Modi.

But, why is RBI governor silent?

Agree, demonetisation was a political decision but the total absence of Patel, who is the face of the central bank after all, in this whole crucial affair is unfortunate and raises several questions on the RBI’s independent character. Communication is equally important for a central bank as decision making. This is particularly important when the whole country is feeling the pain of cash crunch and confusing signals were emerging out of government on cash withdrawals/deposits. But, Patel wasn’t in the picture.

The central bank governor, the statutory authority of monetary policy and currency, remained on the sidelines throughout the spectacle. Though Patel was seen alongside economic affairs secretary, Shaktikanta Das, at the Delhi presser, Modi's surprise announcement and the body language of technocrats at the Finance Ministry-RBI joint presser clearly signalled that the government has effectively hijacked the show.

Does this also prove that how the Modi government has gradually deconstructed the image of the central bank post the Raghuram Rajan-era? The importance of the RBI has significantly been undermined by the government when the monetary policy committee was formed. The way RBI and government presented themselves in the currency crackdown is another example.

A public assurance by governor Patel, the signatory on the currency notes, would have reassured the public and investor community that things are still under control. Given the credibility, integrity and stature of an organisation such as the RBI, such a move would have meant a lot to calm the nerves. Interestingly, both Rajan and Patel have had to face currency-related crises, though in unrelated contexts, in the beginning of their terms. Rajan had to deal with a depreciating currency, which he managed well with swift measures. Patel too has a ‘currency crisis’. He is totally missing from the picture so far.

But, RBI will be called for cash

At the end of the demonetisation exercise, the North Block will likely turn to the Mint road for the windfall profits. How this will happen exactly is still a matter of debate. The assumption doing round in the media is something like this. Over the Rs 14 lakh crore worth of Rs 500 and Rs 1,000 notes that have been banned (86 percent of the currency in terms of value), about Rs 3-4 lakh crore will not likely return to the system, hence it will reduce the liability of RBI, thus boost its profit, which will then be transferred to the central government as surplus.

But, as Anush Kapadia points out in this Mint column, this is only a theory. “This argument is based on a misreading of the central bank’s balance sheet. Currency notes are not the same thing as having a checking account with the central bank. Seigniorage is paid out of the RBI’s income flow but cancellation of currency notes changes only its net worth. Conflating both income and value as well as currency and credit can have seriously monetary consequences,” Kapadia wrote.

Of course, the government is entitled to receive dividends from the central bank, which it transfers every year.

But, that’s from the real income earned by the central bank like investments in bonds etc, not through such an exercise that will become part of its nominal reserves. The ‘windfall’ from the demonetisation wouldn’t constitute real income, most economists believe. But, surely, the government will make its case for the windfall Rs 3-4 lakh crore which it can use to recapitalise banks that are broke on account of huge bad loans. Patel should get ready for a few meetings with the government on this.

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Updated Date: Nov 22, 2016 10:24:44 IST

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