Opinion | Urjit Patel's resignation a body blow to government credibility

Ravi Krishnan

The National Democratic Alliance (NDA) government's credibility as the manager of India’s economy has been erased with the stroke of a pen as RBI governor Urjit Patel signed his resignation letter.

The government had built a lot of goodwill when in 2016 it had come to an agreement with the central bank for the flexible inflation targeting framework. A monetary policy committee targeting inflation within limits set by the government was the perfect model where the central bank had operational independence while meeting targets set by the elected executive.

However, the government has given up all that goodwill and credibility by, to all intents and purposes, forcing Urjit Patel to resign. To be sure, if the government felt that its views needed to be taken on board, it could have developed a consultative framework to enable RBI board members have a greater say while allowing the central bank management operational autonomy. But the government rode rough shod over the central bank,threatening to use its powers under section 7 of the RBI Act.
Patel's resignation is the worst possible outcome from the unseemly fracas.

It adds to the chorus of voices that say that the present government is steadily undermining the robustness of institutions in India. Think CBI, think the judiciary: the government hasn't exactly covered itself with glory when handling these key institutions of the republic.

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There will of course be disagreements between government and central banks. We have seen it earlier in India and around the world as well. But the manner in which the government has handled the issue leaves much to be desired.

Remember that Patel's is not an isolated case. His predecessor Raghuram Rajan had earned the ire of the same government and left because "there was no offer on the table."

Patel, Rajan, chief economic advisor Arvind Subramanian, Niti Aayog vice-chairman Arvind Panagariya – the list of eminent economists who have resigned from the government seems to show that it has scant respect for technocrats. Even Nachiket Mor's sacking from the RBI board a year after he was given a 4-year extension points to that.

To be sure, this is not to say that Patel was perfect. Far from it. Under his tenure, the demonetisation execution was messed up, RBI had difficulty in fine tuning its inflation model and some decisions were taken – such as ouster of some private bank chiefs - without much explanation. The markets and the public were left searching for explanations.

That is all in the past now and there are no winners in this fight. Patel's resignation could not have come at a worse time. He timed it to a day before the assembly elections are due and the markets are nervous.

The Prime Minister and Finance Minister have taken to Twitter to offer anodyne statements on Patel’s greatness and how they would miss working with him. But the need of the hour is to find a replacement for Patel quickly.

They should find a successor who is independent and credible to the outside world. They have to show foreign investors that RBI still has operational autonomy. The central bank is supposed to act as a check and balance to the government. The government's wanting a say in operational matters best left to technocrats not only sets a bad precedent but also sends a signal that it does not care.

That is dangerous in an oil importing economy with a chronic current deficit which is dependent on foreign inflows.