By Nantoo Banerjee
Poor Reserve Bank of India governor Urjit Patel! Only two years ago, soft-spoken Patel appeared to be the government’s ‘perfect’ choice for the job. It was more so after the NDA government found it increasingly difficult to deal with his more combative predecessor, Raghuram Rajan, ever since it came to power in 2014. Rajan left an unhappy RBI governor after an idle speculation inspired by BJP leader Subramanian Swamy’s campaign calling for him to leave. Rajan first announced his departure himself in a letter to his colleagues which RBI published. Rajan wrote that he will be returning to academia after the end of his tenure as governor. Prior to his appointment as the head of India’s central bank, Patel was as a happy deputy governor, who looked after the functions of monetary policy, economic policy research, statistics and information management, deposit insurance, communication and ‘Right to Information.’ In RBI, a deputy governor is rarely elevated as the governor. The government often preferred a retired or retiring bureaucrat to a professional economist for the RBI top job. After facing frustrating times to deal with Raghuram Rajan for over two years, Patel was selected and elevated to succeed Rajan as RBI governor on September 4, 2016. Few believed that this academically brilliant, mild-mannered Kenya-born Gujarati economist, a product of LSE, Oxford, Yale and IMF, too would be difficult to handle in the process of the NDA government’s growing tendency towards grabbing most of the central bank’s key powers that are in conflict with its fiscal policy. The process started since the time of former finance minister, Palaniappan Chidambaram. However, Patel and his team do not seem to be easily pliable, either. A bitter turf war between the government and RBI may have just begun.
Less than a fortnight ago, Deputy RBI Governor Viral V. Acharya, also a brilliant economist, who called himself ‘poor man’s Raghuram Rajan’, made a well-calculated outburst against the government’s latest pressure on the central bank to relax its lending restrictions on some banks and to trim RBI’s regulatory powers by setting up a new regulator for the country’s payments system, ahead of Lok Sabha election. Acharya said that undermining a central bank’s independence could be “potentially catastrophic”. He felt “more needed to be done” to ensure effective independence for the central bank in its regulatory and supervisory powers. Acharya also noted in his address to top industrialists that the Argentine government’s meddling in its central bank’s affairs in 2010 led to a market revolt and a surge in bond yields. He said that rash moves (by the government) could trigger a “crisis of confidence in capital markets.” Acharya, who had three of his fellow deputy governors in the audience, also reportedly thanked RBI Governor Urjit Patel for his “suggestion to explore this theme for a speech,” in a show of unity from an institution typically known for its restraint. Obviously, RBI is not ready to surrender its independence.
However, this is not the first time that a central bank management in a democracy has come face-to-face with its own government on ‘autonomy’ issue. It has happened in the US, UK and EU, among others. It is the central bank’s largely autonomous powers to broadly control monetary policy, banking system, inflation and lending rates that often bring it in conflict with the government fiscal and economic policies and agendas. Earlier this year, US President Donald Trump sharply criticised the Federal Reserve, saying interest rate hikes are hurting the economy. Trump even went up to the extent of threatening the Federal Reserve System saying that he will have the opportunity to fashion the central bank in the image he would like as he has four vacancies to fill on the board of governors. The result could be a more politicised Federal Reserve. The US president has multiple reasons behind his seeking to control Fed. Trump is against over-regulating American industry. He believes that the US Fed is pushing stringent monetary regulations on the nation. By raising interest rates and stopping money supply increase, Trump thinks that Fed is standing in the way of US economic growth. He wants to control the Federal Reserve’s Board of Governors. The Fed board is required to have seven members. It has three. Two of the current governors were put into their position by President Trump. Two more have been nominated by him. The president can nominate two more. In essence, it is possible that six of the seven Federal Reserves board members will be put in place by Trump. In a way, a somewhat similar exercise was carried out by the NDA government at RBI, leaving the governor with only a casing vote.
Lately, the EU Commission’s imposition of extra tasks on the European Central Bank through secondary legislation was criticised as an “attack to its (ECB’s) independence”. The ECB chief vowed to refuse any future imposition of extra-Treaty tasks given to the EU Bank until the Commission agreed on the implementation of substantial reforms of its key financial Treaties. He said: “We have to adjust the ECB’s monetary policy tool-kit to ensure that it can fulfil its role.” The conflict is on and will probably continue even after the scheduled exit of German Chancellor Angela Merkel. Incidentally, the US Federal Reserve is often described as a model of an independent central bank, with the authority to resist political pressure and act in the long-term best economic interest of the country. But, this is only partly true. The US monetary policy has frequently yielded to other governmental requirements. Even for the modern Federal Reserve, independence is a nuanced, mutable and, ultimately, fragile concept, but one that is essential to maintain. This may be true about India’s Reserve Bank as well. Its autonomy is important for the Indian democracy and its economy. (IPA Service)