EDITORIAL| A growing crisis of govt’s credibility

Damage due to Patel’s resignation will go well beyond the economy

With his resignation, Reserve Bank Governor Urjit Patel has sent out an unmistakable message that he would rather quit than be forced to be a party to undermining the independence and autonomy of the central bank. Patel has cited personal reasons for his decision but in the context of the differences and even a standoff between the RBI and the government on a number of issues, it is clear that the resignation was caused by public concerns, and not by private matters. It is an indictment of the government and deals a serious blow to its credibility and economic management, which is basically at the root of its differences with the RBI. Central bank governors have resigned in the past. There have also been serious differences between the RBI and governments on many issues, but they were usually resolved in a spirit of compromise, with both sides respecting each other’s positions. Obviously, that did not happen now.

There was an impression that after last month’s board meeting of the RBI and Patel’s appearance before a parliamentary standing committee in the last week, the differences between the regulator and the government had been narrowed down. But it is now clear that they were too deep and serious to be resolved. At the heart of the rift is the RBI’s role in the system. Giving in to the demands that the government made on it would have affected its role and damaged its credibility, which is important for the country’s financial stability. The loss of credibility will have repercussions outside the country, too. The main differences related to the RBI’s restraint on lending by debt-strapped banks, the management of liquidity by NBFCs and the government’s claim on the RBI’s capital reserves. The government even contemplated invoking Section 7 of the RBI Act, which empowers it to issue directions to the RBI.

The government’s demands on the RBI have not arisen from any principled position but from its need to splurge on populist measures in the months before the Lok Sabha election. The RBI has felt that the government has encroached into its turf with some of its recent decisions. A warning was issued by Deputy Governor Viral Acharya in October, and there were other notes of caution. Patel’s resignation is their culmination. There has been pressure on other institutions like the Supreme Court, the Election Commission, the CBI and even the armed forces. Democracy suffers when independent institutions are sought to be suborned. Patel’s resignation comes when the economy faces serious challenges. It will now have to face the consequences of a credibility crisis, too. The damage will go well beyond the economy.