Central bank, government bonhomie disappearing!

Is the bonhomie between the chosen Reserve Bank of India (RBI) Governor Urjit Patel and the government of the day disappearing? At least it appeared so when the governor at a press conference after the second bi-monthly monetary policy review of 2017-18 stunned his worst critics by answering certain questions on RBI’s autonomy.

 Also, the kind of words he chose to respond to queries on farm loan waivers, which seeped through the gasket onto the ground ever since Prime Minister Narendra Modi during his election campaign for Uttar Pradesh Assembly promised such waivers. The series of demand for loan write-off that followed by more and more states have raised the spectre of weakening state finances.

“I think we need to create a consensus such that loan waiver promises are eschewed. Otherwise, some sovereign fiscal challenges in this context could eventually affect the national balance sheet,” Patel said in his reply to a reporter’s query. Patel is privy to the consequences of the UPA government’s over Rs 60,000 crore farm debt waiver on country’s fiscal health for many years after it was announced in 2008.
Patel is not alone in expressing concerns over loan waiver. A report by Bank of America Merrill Lynch this week too warned that $40 billion, equivalent to 2% of GDP, will be written off in the run-up to 2019 election, of such populist moves are adhered to. But given Patel’s low profile image and publicity-shy nature, his comments were seen as hard hitting.

Patel also chose to make public a finance ministry’s request for a meeting with Monetary Policy Committee (MPC) members ahead of policy review and MPC formally declining to the request. The cumulative impact was a sharp reaction by Chief Economic Adviser Arvind Subramanian on behalf of finance ministry. A miffed Subramanian did not only question the inflation math by RBI but also doubted its inflation forecast methodology. He issued a long statement finding errors in RBI’s forecast and also gave his own outlook on inflation which showed it was going to be largely under control in the months to come.

The disagreement between the two high profile offices may prompt economists to do more data crunching on whether inflation has an upside risk (RBI’s assessment) in the days to come or it is going to be benign (CEA’s view). However, for a layman it is nothing more than the usual rift between the Governor of RBI and the government of the day.

The rift was dormant until now in the BJP-led NDA government because Patel was widely regarded as an intellectual giant and yet a subdued and silent officer who would toe the government’s line. This belief became stronger when the Kenya-born, albeit with a scant Gujarat connection, Patel chose to remain silent taking all public criticism during demonetisation period. The RBI was thoroughly criticised for giving no clarity on the whole demonetisation process and more so on the number of junked currency notes coming back into the system. It is a different matter that the central bank has so far refused to give a number on this saying that the counting process is still on.

But those days in November-December when the public anger was at its peak, Patel chose not to speak or may be he was instructed not to speak until he held his first press conference after monetary policy review exactly a month after demonetisation on December 7. Till then the former Economic Affairs Secretary Shaktikant Das faced the press and public on the matters which fell completely into RBI’s domain.

Patel was also called as Prime Minister Modi’s man who saw virtues in demonetisation within two months of his becoming the RBI Governor, whereas no other former governors had seen a virtue in such a move. Former finance minister P Chidambaram went on to say that demonetisation was one of the reasons former RBI governor Raghuram Rajan was made to quit. “They wanted demonetisation and Raghu was opposed to it,” Chidambaram had said on more than one occasions.

Patel has so far not spoken a word even on the most basic question on when the RBI will complete the counting process and come out with a definite number of junked currency notes deposited post demonetisation. The question is largely being tackled by the Finance Minister Arun Jaitley who recently tried to once again make people believe that the counting process was lengthy and time consuming.

But the issue of inflation and the Central Bank’s autonomy were something on which the governor may have chosen to defend the institution. After all the 52-year old was chosen to be the RBI governor last year for his expertise in inflation control and has shown his characteristics of being an inflation hawk. So far, the MPC has held four monetary policy reviews since it was set up last year. Of these four reviews, it has lowered the policy interest rates only once that too only by 0.25%. This time too, justifying the rate status quo, the MPC’s press note said that the problems of stagnant private sector investment, the state of the banking sector and infrastructure bottlenecks cannot be addressed by lowering interest rates.

So far as finance ministry nudging the RBI for more and more rate cuts is concerned, it is nothing new. The Central banks across the globe are said to be autonomous but the autonomy is always only implied and scarcely respected leading to friction between governments and the Central bankers. The former is concerned with economic growth alone and the latter’s mandate is to control inflation first. In India too, the autonomy appears to be by and large notional. It happened even during the years of Lehman Brothers collapse when the RBI was fighting to restore stability and the government on a frequent interval raised its pitch for rate cut. Patel too has to face all such things, albeit in a more pronounced manner.

The government, of late, has set up a Monetary Policy Group (MPG) that is tasked to review the MPC’s decision on holding the key policy rates and whether they have taken into consideration factors such as price rise, economic growth, domestic demand and supply, credit growth and prevailing global economic situation while deciding the rates. Does autonomy appear to be more at threat now?!

Patel, who was appointed as governor for a three-year tenure, has two-and-a-half more years to go. Only time will tell whether the man who has worked under masters such as former prime ministers P V Narasimha Rao and Manmohan Singh, Chidambaram, and his senior Rajan at RBI among others, will be someone who toes government's line or saves autonomy and integrity of the age-old institution he has come to serve.