Urjit Patel’s untimely resignation throws up more questions than it answers. The government’s handpicked replacement to Raghuram Rajan has left midway after a widely reported conflict with the government. His replacement is already being vilified for being an MA in history, as if economics is a part of STEM and not humanities. The usual suspects who painted Patel as a government crony during demonetization have now painted him as the Neelkantha who finally said no to poison. After Viral Acharya’s public acknowledgement of a rift, the financial press has had a busy couple of months speculating and vilifying the government for undermining the independence of the Reserve Bank. Unnamed sources are given more weight than official government spokespersons in order to make for juicy headlines and doomsday predictions.
The truth though may be a lot more nuanced and a lot less forthcoming. Former RBI governors and deputy governors have acknowledged how spats between Mint Street and North Block are not unique. The novelty is the public nature of the row this time around which has given the financial press a lot more to speculate about. Urjit Patel’s resignation is no doubt a loss for the nation of a very capable economist and central banker who will leave a rich legacy for his actions on bank cleanups and taming inflation. Yet it should not be used as an excuse to gloss over any shortcomings.
It was going to be a tough task for anyone to replace the larger than life persona of Raghuram Rajan. Rajan was a very effective communicator, an ability which is very much valued for a central banker. Urjit Patel on the contrary was reticent and media-shy. He was touted as perhaps not the best communicator which led to speculation about government’s frustration at not having the ear of a trusted lieutenant. He was also accused of being unavailable to India Inc. which always makes markets jittery. But perhaps a more serious charge was a faulty inflation forecasting mechanism which has been overestimating inflation. Central bankers are often disparaged if inflation exceeds forecasts but in a developing country like India the contrary must also be viewed as a significant policy failure. The need for growth and jobs means that a calibrated tightening stance of RBI, when unwarranted, could spell doom. In a democracy, nobody gets away without oversight. Independence and accountability are two sides of the same coin. The Monetary Policy Committee’s most dovish member, Ravindra Dholakia, has long been critical of RBI’s inflation forecasting mechanism. Case in point being the recent loss of state elections for the BJP which can also be attributed to low rural inflation leading to depressed rural wages.
Amid this sentiment comes the 25th RBI governor, Shaktikanta Das who prima facie appears to be a yes-man appointment by the government of the day. Yet his credentials are promising and to write him off as a stooge seems premature and motivated. The markets have cheered his appointment with the Sensex posting heavy gains and the 10 Year GSec yield also falling in hopes of a change from calibrated to neutral stance of RBI and a rate cut as early as next year over falling CPI and economic growth. The rupee though has lost some of its value after Patel’s resignation. Fuel prices continue to stay benign even after cuts announced by OPEC. Narendra Modi must consider himself lucky if the trend continues a few more months as it will effectively ensure lower inflation and a smoother path to re-election.
There is wide ranging speculation as well on extensive farm loan waivers and bailout packages for rural India being brought about in an election year which can lead to slippages on the fiscal front. The government though has so far seemed confident of reaching its fiscal math; so much so that it had already reduced borrowing targets during the first half of the fiscal. Indian politicians have long been guilty of distorting farm economics and handling agriculture with a short term view that has meant more pain for farmers. Farm sector reforms have always seemed elusive for fear of alienating any number of vote banks. The current regime too has failed to bring about effective farm reforms that can ensure that market dynamics play a bigger role in Indian agriculture than upcoming democratic compulsions. They must now not slide down the path of populism like their predecessors did, which ultimately led to double digit inflation. Sensibility must prevail in spite of friendly faces at the helm of RBI and in advisory roles as CEA.