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Mainstream, VOL LVII No 1 New Delhi December 22, 2018 [Annual Number]

The RBI: Clash of Two Paradigms of Governance

Sunday 23 December 2018, by Arup Kumar Sen

The abrupt resignation of the Reserve Bank of India (RBI) Governor, Urjit Patel, and the appointment of Shaktikanta Das, who served as Secretary in the Department of Economic Affairs, Ministry of Finance, upto May 2017, has brought into the public sphere the clash of two paradigms of governance. Patel’s resignation “came after over a month-long tussle over policy with the government that raised concerns about the central bank’s independence”. Reportedly, the areas of disagreement between the Finance Ministry and RBI mainly centred on the following three key issues— “transferring the RBI’s reserves as profits to the government, relaxing strict rules on lending for weak banks and conditions for loans to stressed power plants, including plants run by Adani, Essar and the Tatas”. (The Telegraph, December 12, 2018) To put it in the words of the report carried in The Telegraph: “The first of the government’s demands stems from its eagerness to somehow draw upon the RBI’s kitty to try and fund populist measures in a pre-election year”.

While commenting on the resignation of Urjit Patel as the RBI Governor, The Economic Times observed: “There has been speculation of his resignation after Deputy Governor Viral Acharya’s speech last month that sought to defend the autonomy of the RBI.” (ET Online, December 11, 2018).

Viral V Acharya, deputy governor of the RBI, delivered the A. D. Shroff Memorial Lecture in Mumbai on October 26, 2018. The title of his lecture was: “On the Importance of Independent Regulatory Institutions: The Case of the Central Bank”. He argued in the lecture: “The world over, the central bank is set up as an institution separate from the government; put another way, it is not a department of the executive function of the government; its powers are enshrined as being separate through relevant legislation”. In defence of his argument for the autonomy of the central bank vis-a-vis the government, he said:

A government’s horizon of decision- making is rendered short, like the duration of a T 20 match (to use a cricketing analogy), by several considerations. There are always upcoming elections of some sort- national, state, mid-term, etc. As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy...In contrast, a central bank plays a Test match, trying to win each session but importantly also survive it so as to have a chance to win the next session, and so on. In particular, the central bank is not directly subject to political time pressures and the induced neglect of the future...”

So, there is a distinct clash between two paradigms of governance. We cannot predict with certainty which paradigm of governance the new RBI Governor, Shaktikanta Das, will opt for. However, his pro-government position is well-known. He is a vocal supporter of the demonetisation move of the Modi Government. Reportedly, on the first anniversary of the note ban, he tweeted: “One year of demonetisation. Significant gains for the economy...”. Moreover, in February 2017, “Shaktikanta Das made headlines when he severely criticised rating agencies such as Moody’s, Fitch and S&P for not upgrading India’s sovereign rating.” (See, December 11, 2018). What Pronab Sen, former Chief Statistician of India and former Principal Economic Advisor to the erstwhile Planning Commission, said in the wake of appointment of the new RBI Governor is worthy of our serious consideration:

“The person itself doesn’t matter that much. What really matters is the process. So, if you have a situation where a position as important as the Governor of the RBI is filled within 24 hours of the resignation of the incumbent, that will raise eyebrows...For other positions, the government has taken months to find replacements. RBI Governor, you do it in 24 hours. So, people are going to say, clearly this guy had already been identified. And, the situation was created where Urjit Patel had to quit...”

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