The Reserve Bank of India has just gone through tumultuous times. A Governor who had one year left for his term suddenly resigned, sending shock waves through the stock markets and banking circles while spooking the investor community. The government reacted rapidly by making a fresh appointment but concerns are still being evinced about its worsening relationship with the RBI. Fears are being expressed over the fate of the RBI’s independence and autonomy, given the fact that the previous governor, Urjit Patel, left in the wake of reports that the there was serious dissension between the bank and the government over a host of issues.
The new incumbent, Shaktikanta Das, a former economic affairs secretary, may not have the academic heft of the previous RBI governor, but brings to the table considerable experience in dealing with political leaders of all hues. He has worked under Pranab Mukherjee, P. Chidambaram, and Arun Jaitley, and had a harmonious relationship with all of them. In addition, he is yet another in the long line of ex-bureaucrats who have helmed the RBI including Y.V. Reddy, D. Subbarao, S. Venkitaramanan, Bimal Jalan, and Manmohan Singh. Several of them had serious differences with the government of the day, notably Y.V. Reddy and Subbarao. Hence the tensions arising between the There are fears over the fate of the RBI’s independence and autonomy economy central bank governor and the Finance Ministry are not a new phenomenon. In fact, many consider the dissonance to be a healthy part of the relationship between any central government and the government.
In the latest case, however, it erupted into the resignation of Patel, clearly indicating that the diplomatic skills needed for dealing with prickly situations were lacking either in the governor or in Finance Minister Arun Jaitley. In this case, the onus seems to lie more on the government, given the fact that Patel’s selection was made by the present regime. In the case of the earlier incumbent, Raghuram Rajan, the differences with the NDA regime were blamed on the fact of his being appointed by the UPA. No such excuse can be made in the case of Patel who was in fact touted to be Modi’s man on the basis of his being a Gujarati (even though his native land is Kenya) and also having worked briefly for the Reliance group. Now in a complete turnabout, the same person who was termed an apologist for NDA policies during demonetization has now become a media hero for having stood his ground on issues related to the RBI reserves and curbs on the banking sector. It has to be said that probably Patel was his own man from the beginning and genuinely agreed with the government on various policy issues, including demonetization. Several economists did support the measure which has been widely criticized even though it had a draconian effect on the economy, according to the former chief economic advisor, Arvind Subramanian. Patel may have been one of those who saw its positive aspects.
In the recent areas of disagreement, however, he clearly was not in favor of the government seeking a higher share of the RBI’s capital reserves or the withdrawal of prompt corrective action (PCA) guidelines on weak banks. While not coming out in the open to declare his views, deputy governor Viral Acharya’s public comments which sparked the controversy evidently echoed his stance. The differences appeared to have been narrowed down at the last RBI board meeting but there must have been a subsequent flash point which led to Patel’s abrupt exit. Be that as it may, it is clear the present regime finds it difficult to hold onto its main economic advisors. Apart from the RBI governor’s departure which has come into the headlines, it must be noted that both Arvind Panagriya who headed the Niti Aayog and Arvind Subramanian sought to end their tenures sooner than expected.
Panagriya who was always a vocal supporter of Narendra Modi while lecturing in academic groves abroad was brought in to convert the Planning Commission into a more relevant institution which was renamed as Niti Aayog. He left after just two and half years, claiming he could not get more leave from Columbia University. Reportedly, he was concerned over the impact of demonetization on the common man, among other issues. As for Subramanian, he left in June this year apparently due to pressing family commitments. But he has now come out with a book talking about the draconian impact of demonetization on the economy. Like Panagriya, he too was a professor at an international institute abroad when he was handpicked by this regime to take charge of economic policymaking. The rapid turnover, right from Raghuram Rajan who returned to academia in the University of Chicago to Arvind Panagriya to Arvind Subramaniam to Urjit Patel, clearly indicates there is a serious problem in dealing with economic advisors and heads of critical institutions like the RBI. The Finance Ministry has to bear the major responsibility on this score. But it could well be due to pressures from other organizations of the Sangh Parivar on the political leadership.
For instance, the appointment of S. Gurumurthy on the RBI board was a clear move to politicize a hitherto non-political autonomous agency. What has also been interesting is the reliance on the Indian diaspora abroad for these appointments. In a reversal of this trend, ex-bureaucrat Shaktikanta Das has been brought in to head the RBI while a professor at Hyderabad’s Indian School of Business Krishnamurthy Subramanian has been appointed to the post of chief economic advisor. This change, however, is no guarantee that these appointments will last longer than the previous ones. Former bureaucrats have notoriously tended to change from being pliable executives to independent voices when placed in constitutional posts giving them autonomous authority.
Instead it is now for the government to change tack and adopt a more accommodating and positive posture to economic advisors who are in any case aligned with the ideology of the day. It is only a sea change on these lines that will enable a longer tenure for such advisors. The outlook should continue to be for the long run to ensure effective governance even though elections are just a few months away.