PM Narendra Modi’s war against RBI

I am no fan of Urijit Patel. While his qualifications and competence for the top job at our central bank are beyond reproach, he was complicit with PM Modi in unleashing demonetisation on an unsuspecting and innocent nation.

The time to speak truth to power was then. The time to oppose the PM’s decision and to strenuously persuade him to change course was then. The time to step aside was then. It appears to me that the current Prime Minister or any leader is ill-served by those who for whatever reason do not speak up when it is absolutely necessary to do so.

Reportedly, those around the Prime Minister are fearful of speaking their minds in his presence. No wonder the BJP leaders have an ‘all is well’ air about them. Perhaps Urjit Patel should have shared this quote by Joseph Stiglitz, an economics Nobel Laureate, with the Prime Minister: “Smart people are more likely to do stupid things when they close themselves off from outside criticism and advice. If there’s one thing I’ve learned in government, it’s that openness is most essential in those realms where expertise seems to matter most.”

Be that as it may, the country needed the RBI to help stabilise the economy. On that front, post demonetisation, the RBI has done a good job of providing the nation with a sense that our institutions are capable of cleaning up messes created by politicians. The government and the RBI worked together to implement the monetary policy framework and things seemed going well for some time. However, this changed earlier this year as the government started asserting greater control over the RBI, which has traditionally maintained substantial operating autonomy.

Three issues deserve special mention. First, the government appointed an RSS-ideologue and a known RBI critic to the institution’s board. Second, the government demanded that the RBI transfer a much higher surplus to the government than usual because it feels the RBI’s surplus reserve is higher than global standards. Third, the government is creating an impression that the RBI’s stance is stifling credit, even as non-performing assets have grown.

Appointing RBI baiters, especially those with no apparent qualifications but their ideological rabble rousing, must have ruffled feathers at RBI. The Prime Minister may not value Harvard, as he implied last year, but to those who have worked hard to get world class education and training place a premium on competence and qualifications.

I can’t imagine how disrespected RBI officials must have felt when an arrogant and out-of-control government was browbeating them through political hacks. After suffering the ignominy of participating in voodoo-powered demonetisation, this must have been the proverbial last straw.

What about transfer of surplus funds to the government? First, a government that never fails to congratulate itself about high economic growth, higher tax collections, and more taxpayers, seems desperately out of funds.

If all is swell, and if the government collected over ₹10 lakh crore in fuel taxes, why are the government’s finances so tight? What about the fact that the RBI transferred ₹527 billion per year in the first four years of the Modi government while the UPA received just ₹292 billion per year in its last four years? That means the Modi government collected almost twice as much per year from the RBI than UPA did. However, you didn’t find Dr Manmohan Singh running roughshod over the RBI. You didn’t see the government forcing Raghuram Rajan to reduce interest rates as the UPA was gearing up for a tough election in 2014. In fact, Rajan increased the rates on multiple occasions after he took over as Governor.

Finally, blaming the RBI for NPAs and credit problems is disingenuous. If Modi took advice from experts, I am certain he would have dealt with the NPAs in his first year. Institutions such as the World Bank and IMF and the government’s own Economic Survey had flagged NPAs as a growing problem. However, the problem in 2014 was much smaller. But, instead of unclogging the banking sector, which was necessary, Modi went after the land bill. Instead of dealing with the lifeblood of the economy, Modi went on a tangent. That was a strategic blunder. Demonetisation and an incompetent GST rollout only compounded that original sin.

By attacking institutions such as the RBI, the Modi government is inviting a credibility crisis. We are only days removed from a revision of GDP numbers that, frankly, makes India look like a data manipulator.

Team Modi is also undermining institutions such as the Election Commission, Information Commission, the CBI and many others. The impact of a rampaging government will be far greater than what most people imagine. As Patel’s predecessor, Raghuram Rajan, noted, “All Indians should be concerned about Governor Patel’s resignation.” Dr Manmohan Singh believes Patel’s resignation is a “severe blow” to the economy. If we don’t listen to these experienced voices, India will be the poorer for it.

The author, formerly with the World Bank, is a member of the Indian National Congress. His forthcoming book on the economy under the Modi government is being published by Penguin Random House India. Views expressed are personal. @salmansoz; atworksalman@gmail.