Urjit Patel And DeMo: Time To Debunk False Binary Over RBI Autonomy Or Lack Of It

It has now become par for the course for political critics of the Narendra Modi government to cry that the Reserve Bank of India’s (RBI’s) autonomy and credibility have been eroded. With some former finance ministers (P Chidambaram) and Reserve Bank of India (RBI) governors (YV Reddy) now claiming they would have resigned if asked to implement demonetisation, the chorus is rising to a crescendo. Arun Shourie, now a sour-grapes critic of the government, has piped in.

The media, never too friendly to this government, is now fanning the flames, ensuring that the RBI’s credibility is damaged not through the latter’s own actions, but by repeating the lie that its autonomy has been eroded just for one act – of supporting the government on demonetisation. V Anantha Nageswaran has called out the phony defenders of autonomy in his blog: “Sections of the media are whipping a story to death, to the point of maximum revulsion and well past its point of usefulness or effectiveness. More than the RBI’s acquiescence, it is these criticisms that would not diminish RBI globally.”

In short, mindless criticism is destroying the RBI’s credibility, just as the “church attack” incidents were used to paint the Modi government as anti-minority. No apologies are given even for manifestly wrong or tendentious reporting.

However, it is worth taking up these criticisms to expose the hollowness of the arguments made to defame the RBI. Dislike for the Modi government is morphing into attempts to damage a respected institution like the RBI, just as similar damage was inflicted on the army when political parties questioned its “surgical strikes”.

Let’s examine, first, the issue of whether the RBI under Urjit Patel has actually compromised any of its autonomy.

Patel has announced two monetary policies, and also made a speech or two in areas related to his responsibilities. In his October monetary policy, the Patel-headed Monetary Policy Committee (MPC) cut repo rates – as widely expected. In the December policy, he didn’t, even though the post-demonetisation justification for cutting rates was even stronger, as banks were flush with cash and the economy was impacted by demonetisation. Did he sound like he was kowtowing to the government?

Not only that. Even before the monetary policy of December was announced, Patel raised the cash reserve ratio (CRR) to 100 per cent retrospectively, thus putting the government on notice that it will have to deliver monetary stabilisation (MSS) bonds to absorb the excess deposits. This will cost the government, and the RBI’s shock announcement does not indicate any subservience to the government in the conduct of monetary policy. In fact, it delivered a counter-shock to government-owned banks who thought they will get an easy bonanza from rising deposits. A quiescent Governor would have worked out a behind-the-scenes deal with the government for MSS bonds without hiking the CRR.

More recently, at the Vibrant Gujarat Summit, the Governor warned the government against easing up on fiscal rectitude; he also warned it against too many interest rates subventions, which the Modi government has been prone to doing. He made both these observations in the Prime Minister’s backyard of Gujarat, and no credit was given for his forthrightness. Far from it, Patel is being criticised for not speaking enough – when his tenure is just about four months old, and he is yet to grow into his job.

Then let’s examine the other – effectively the main – criticism that he should not have backed demonetisation; it is implied that since he backed the government’s decision, he must somehow have reduced himself to a lackey of the finance ministry.

This is a load of bull. If the only way to prove your autonomy is by opposing the executive, then this is a no win situation for both the RBI and the government.

When confronted with the government’s decision to demonetise, Patel had two choices: one was to make his disagreement (assuming he disagreed) known, but still back the government if it decides to take the plunge. The other is to quit – including by admitting himself to a hospital, as one former governor suggested he would have done.

It is easy to quit in a halo of glory, but it is tougher to back a critical decision and make it work. In my view, Patel took the more courageous decision to back demonetisation and try to make it a success. That he may have failed to some extent on execution is something we know after the decision was made, but can anyone predict what exactly will go wrong when such a big decision is made? Patel probably didn’t reckon with the highly compromised nature of Indian banking, especially the public sector part of it.

It also needs pointing out that almost no governor of the RBI has resigned on any major decision taken by the government of the day in the last half century.

No RBI governor resigned when banks were nationalised, not once, but twice, by Indira Gandhi, as Anantha Nageswaran has pointed out.

No Governor resigned when various state governments and even the centre wrote off farm loans, even though they seriously damaged the repayment culture for banks. Thanks to the 2008 farm loan waiver, which happened towards the fag end of YV Reddy’s governorship, it is now widely expected that every government will write off loans before a general election. Rahul Gandhi is already demanding it, and one will not be surprised if the Modi government succumbs to this political pressure in 2018.

No governor ever resigned when the UPA was ruining the fiscal math repeatedly after 2011.

No RBI governor resigned when thousands of crores of bank loans were being arm-twisted out of government banks to help failing companies like Kingfisher.

Forget the RBI. Have the US Fed or the European Central Bank or the Bank of Japan ever done anything remotely unsettling to their governments over the last eight years since Lehman happened? They have been busy printing money to shore up the economy, something they would have advised against to almost any third world nation.

A more subtle point needs to be made regarding autonomy. In the western binary world view, you either have autonomy or you don’t. We don’t have to accept this as God’s truth. The reality, even in the west, is that we all have substantial amounts of autonomy, but never complete autonomy. Autonomy is something each institution or individual works far, and comes from the credibility of sustained actions.

For example, we consider media freedom as real, but consider how partisan the US media behaved during the recent US presidential election. Or consider our own media during the 2014 elections and after. It was often the social media that took up views unpalatable to the establishment. But it is old media that is calling for restricting the freedoms of social media.

When media is owned by corporate interests or even dependent on it for advertising, how free can it really be? On the other hand, it is foolish to pretend that no freedom exists, as the loud attacks on politicians and institutions show.

The truth is the media, with all its biases and limitation, is collectively free, even though each individual media house may operate within financial and political constraints.

Are the executive and legislature free? During the UPA regime, even the Prime Minister’s office was mortgaged to 10 Janpath. But this did not mean Manmohan Singh had no autonomy. The Aadhaar initiative was one of his most inspired decisions, and so was the Indo-US nuclear deal. The problem is, during the Manmohan-Sonia era, as the executive dithered, the courts waded into executive and legislative terrain. The legislature’s freedom was compromised by its own pusillanimity and failure to make laws.

Is the judiciary free? When judges look to the government to provide post-retirement jobs of sinecures, how free can the judiciary be? But the judiciary was free enough to smack down the National Judicial Appointments Commission, a law passed overwhelmingly by parliament and more than half the state legislatures.

Autonomy is not something that can be conferred by law or even practice. It is something that is earned by each individual or institution by its long-term actions. And credibility is not established merely by being opposed to actions initiated by the government. It comes from transparency and consistency and a willingness to learn from mistakes.

It would have been easy for Urjit Patel to claim autonomy and become the darling of the media by making loose comments about “Hitler” and “one-eyed kings” in his speeches. That he did not seek to do so speaks volumes for his real credibility.