Urjit Patel, the head of the Reserve Bank of India, resigns
LAST MONTH Viral Acharya, a deputy governor of the Reserve Bank of India (RBI), suggested in a speech that the Indian government was risking “economic fire” by meddling with the bank. If he was right, on December 10th the last chance of dousing the flames may have been missed. Urjit Patel, the RBI’s governor, abruptly resigned, citing “personal reasons”. He has been replaced by Shaktikanta Das, a career civil servant who is thought to be an ally of Narendra Modi, the prime minister. The rupee dropped by 1.8% against the dollar on the news.
Mr Patel’s resignation came ahead of a board meeting on December 14th (after The Economist went to press). These gatherings used to be unremarkable, but in recent months board members friendly to the central government, in particular Swaminathan Gurumurthy, a Hindu-nationalist journalist appointed in August, have turned them into battles over RBI policy. Mr Patel fought back, not least by permitting Mr Acharya’s speech, which brought the struggle into the open.
The main argument is the stuff of economics textbooks. The government, facing a general election next year, wants the RBI to loosen monetary policy. And it wants the bank to pay it a bigger dividend from seigniorage profits, to spend on pre-election giveaways. Both would stoke inflation and compel the RBI, which targets inflation of 4%, to raise rates in the future. But in the meantime a brief boom would be politically well-timed.
There are other points of contention. The RBI wants to clean up debt-addled public banks, which account for 70% of banking assets, even if that means getting tough with well-connected delinquent borrowers. The government, which wants to spur consumer spending and investment in infrastructure, would rather state banks lent more. Arguments swirl, too, about the regulation of private banks.
Mr Das’s appointment may make it more likely that the government will get its way. He was Mr Modi’s secretary for economic affairs in 2016, when the government cancelled 86% of all banknotes by value overnight, causing chaos from which small businesses have not yet recovered. In briefings shortly afterwards, he suggested measures such as inking Indians’ fingers to ensure that they could not change too many old notes into new. (That idea went nowhere.) For a civil servant he is rather keen on Twitter, where he has griped about such matters as Amazon’s Canadian subsidiary selling doormats with the Indian flag on them. He will be “completely pliant”, reckons Vivek Dehejia of the IDFC Institute, a think-tank in Mumbai.
On coming to power in 2014, Mr Modi offered a mix of liberal market economics and cultural populism. But as prospects for his Bharatiya Janata Party have diminished (see article), the first of these has been sidelined. Mr Patel’s predecessor at the RBI, Raghuram Rajan, served just one term after his relationship with the government deteriorated. He moved back to America to teach. Earlier this year Arvind Subramanian, the government’s chief economic adviser, also resigned and took up an academic post in America. As orthodox economists have left, people like Mr Gurumurthy have gained prominence. He argues that the central government needs to take back the power to print money.
Mr Patel’s resignation, and what it says about the government’s attitude towards institutions, is something that “all Indians should be concerned about” said Mr Rajan, speaking on television after news of the departure broke. Indeed.This article appeared in the Finance and economics section of the print edition under the headline “Exit on Mint Street”
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