Rakesh Sharma
On a day that was anticipated to be news-heavy thanks to the assembly elections, what newsrooms across the country did not expect was another bombshell report. Beyonce had come and gone - what bigger news was there to report?! Well, Urjit Patel stepped up to the challenge by stepping down as the governor of the Reserve Bank of India. Boom went the dynamite.
On December 10, Urjit Patel resigned his post, with a statement from him reading, "On account of personal reasons, I have decided to step down from my current position effective immediately." The resignation comes in the wake of a strained relationship between the central bank and the central government over, among other things, the issue of autonomy of the central bank.
The Kenya-born Urjit Patel, alumnus of such institutions as the London School of Economics, Oxford University, Yale University, International Monetary Fund, Boston Consulting Group, and Reliance Industries, can now add the Reserve Bank of India to that list having executed on December 10 an 'I'll-break-up-with-you-before-you-can-dump-me’ move. Former Economic Affairs Secretary Shaktikanta Das has been appointed as Governor of RBI.
The reasons for Patel's departure, the accomplishments during his tenure, reactions from politicians, economists, and industry-watchers, the impact of his resignation on the markets, and all you need to know about the new appointee Shaktikanta Das, will be the topics of discussion today as we dig deeper into the two years (and change) of the man during whose tenure demonetisation and GST rollout happened. My name is Rakesh, and this is the Urjit Patel story on Digging Deeper with Moneycontrol.
Making History
In 1957, Sir Benegal Rama Rau, the fourth governor of RBI - and one of its longest-serving - resigned his post in protest when he faced irreconcilable differences with then finance minister TT Krishnamachari under the Jawaharlal Nehru government. Differences between Rau and TTK had emerged over a budget proposal.
The RBI believed that the TTK's budget proposal to increase the stamp duty would push up the bank rate by half a percentage point and requested the government "to consult RBI in advance on all matters which significantly affect the monetary structure and policy." Nehru, siding with TTK, stated in no uncertain terms that the RBI was part of the various government functions. Nehru wrote, "I pointed to you that it was for the government to lay down policies and the RBI could not have policies contrary to those of the government... that would be completely absurd." Nehru, in turn, wrote, " You have laid stress on the autonomy of the RBI. Certainly it is autonomous, but it is also subject to the central government's directions. Monetary policies must depend upon the larger policies that a government pursues. RBI cannot challenge the main objectives and policies of government."
"If you wish you can send your formal resignation to the Finance Ministry." With that nudge from Nehru, Rau was gone. This anecdote has gained major currency among BJP supporters who have used the ‘Nehru-did-it-before’ angle to justify the growing interference of the central government in the affairs of the autonomous RBI.
The push and pull between administrations and their central banks is a phenomenon neither new nor unique to India. The meddling by the Argentine government in the affairs of its central bank in 2010 prompted big drops in Argentina's financial markets. The tussle between Donald Trump and the current Fed Head Jerome Powel is only too well documented. Similar tussles have also been seen in Turkey, New Zealand and the UK. Closer home, but pre-independence, in 1937, Sir John Osborne Smith resigned the governorship following differences with the colonial government over interest and exchange rates.
History does not repeat itself, but it does tend to rhyme. It appears we are in rhyming season. If in the case of Rau, it was his interference in what the government could pursue that cost him the job, in the case of Patel, it is the lack thereof. The government is unhappy with the central bank for not taking on board its concerns about the economy. The government has been pushing RBI to address its concerns related to providing support to non-banking finance companies in the wake of the IL&FS crisis, as also to address the credit needs of MSMEs and review the prompt corrective action (PCA) framework dealing with weak banks. The government was also seen to be ramping up pressure on the bank to release its excess reserves (to the tune of about Rs 3.6 lakh crore) which commentators have observed, would be used to boost the economy in the run up to the general elections in 2019. The RBI is an entity independent of the government as it takes its own decisions. It looked like Section 7 of the RBI Act - hitherto never enforced - could be placed into effect empowering the government to issue directions in "public interest" to the central bank. In November, RBI Deputy Governor Viral Acharya stated in a speech that has since gone viral that undermining central bank independence, and interference in its functioning, could be "potentially catastrophic."
These, and other issues that cropped up repeatedly in this fractious relationship, broke the camel's back. Urjit Patel resigned.
In his resignation statement, Urjit Patel thanked his colleagues and directors of the RBI Central Board, and attributed the "considerable accomplishments in recent years" to the "support and hard work of RBI staff, officers and management."
Missing from the thank-you list? The government.
Members of the administration, however, were quick to sing Patel's praises. The prime minister said in tweets, "Dr Urjit Patel is an economist of a very high calibre with a deep and insightful understanding of macro-economic issues. He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability. Dr. Urjit Patel is a thorough professional with impeccable integrity. He has been in the Reserve Bank of India for about 6 years as Deputy Governor and Governor. He leaves behind a great legacy. We will miss him immensely."
Finance minister Arun Jaitley also took to Twitter, saying, "The Government acknowledges with a deep sense of appreciation the services rendered by Dr. Urjit Patel to this country both in his capacity as the Governor and the Deputy Governor of The RBI. It was a pleasure for me to deal with him and benefit from his scholarship."
Among the first to react was Dr Raghuram Rajan under whom Dr Patel, referred to by Rajan as his "inflation warrior," served as Deputy Governor. He said, "All Indians should be concerned about Governor Patel's resignation." Dr Rajan said the resignation should be seen as a "note of protest" by Dr Patel.
Another ex-RBI Governor, among other things, Dr Manmohan Singh - who, in his recommendation letter for the appointment of Deputy Governor of RBI has called Patel "very important for the country" said, "Dr. Patel’s sudden resignation, at a time when the Indian economy is faced with many headwinds is very unfortunate and is a severe blow to the nation’s economy. I also sincerely hope that this sudden resignation of the governor is not a harbinger of the Modi government’s attempts to destroy the institutional foundations of India’s $3 trillion economy.” He wrote, “There have been apprehensions expressed earlier by the Deputy Governor of the RBI about the government’s intent to raid the capital reserves of the RBI for fiscal purposes. I hope the resignation of the Governor is not a sign that this may soon become a reality.”
The Indian National Congress, with Queen mode on, tweeted "Another one bites the dust. This is the result of our chowkidar's assault on democratic institutions."
What led to the flight of the vigilant owl?
The face-off between Patel-led RBI and the government has been among the most public in recent memory. Patel's resignation comes just a few days before a scheduled meeting of the reserve bank's board on Friday. At the peak of this crisis, in late October and early November, it was widely believed that Patel may step down. However, after a nine-hour meeting last month, the two parties called a truce. Shortly after, the RBI came out with a release detailing how the pressing issues were tackled.
But clearly, they were not.
Let's take a quick look at the timeline of events that led to Patel's resignation.
February 12, 2018: RBI discontinues all debt restructure schemes except for small and medium enterprises. There, the central bank said if a loan was due for more than 91 days, it was in default and recovery proceedings could be started against the account. As Business Standard noted, " It led to a direct clash, as the government wanted to dilute the provisions to the favour of power firms. The government was upset with the governor over lack of consultation on key regulatory issues, according to finance ministry officials."
August 8, 2018: Government appoints die-hard Sangh ideologue S Gurumurthy, and cooperative banker and Swadeshi supporter Satish Marathe to the RBI’s central board as independent directors. As NDTV's Aunindyo Chakravarty noted, "The swadeshi-spouting chartered accountant who believed that the RBI "has lost its capacity to think for India", and who had openly blamed it for the economic troubles of India's small businesses, was now going to oversee the central bank's decisions." This move was widely thought of as a signal from the government that it wanted monetary policy to be tailored to its political needs in the run up to the general elections.
Mid-September: The government cuts short the term of RBI central board member and noted banker Nachiket Mor, who is also associated with the Bill & Melinda Gates Foundation.
October 10: The government invokes the never-before-used Section 7 of the RBI Act to force down decisions it wants RBI to take through three letters with over a dozen demands. Sources said the finance ministry wrote three separate letters to the RBI on issues ranging from Prompt Corrective Action (PCA) framework to liquidity management and sought consultation under Section 7 of the RBI Act. The government wanted the RBI to carve out an exemption for power companies under the PCA framework that outlines triggers for declaring a loan account as stressed or NPA, sources said adding the second letter pertained to use of RBI's capital reserves for providing liquidity to the market and a third letter was for relaxing constraints on banks for loans to small and medium enterprises (SMEs). The RBI replies to these letters a week later.
October 23: The RBI holds a marathon board meet that lasts for around eight hours but remains inconclusive on most issues that government brought in.
October 26: Deputy governor Viral Acharya goes public to assert RBI’s autonomy, warns of the wrath of the financial markets if it is not maintained through a speech. In a footnote to the speech, Acharya acknowledged that Patel had suggested the theme of the speech. The speech is said to have angered many in the government.
October 29: Another deputy governor NS Vishwanathan delivers a speech in Jamshedpur, making clear RBI’s reluctance to bring down capital levels for banks.
October 30: In the meeting of the financial stability and development council, the government and RBI differ aggressively on credit off-take and liquidity crunch faced by NBFCs
October 31: Government reiterates need for RBI autonomy as “essential” but calls for better governance at RBI.
November 3: Economic affairs secretary SC Garg cites improvements in market indices, the rupee and crude to make light of Acharya’s “wrath of markets” remarks.
November 9: Garg says discussions are on to fix an ‘appropriate economic capital framework for RBI’ and says the government does not want the RBI money.
November 15: RSS ideologue and central board member S Gurumurthy says a standoff between the RBI and government not a “happy thing”. He also says RBI should ease regulations as small businesses are starved of funds.
November 17: Ahead of the RBI board meeting, finance minister Arun Jaitley says growth should not be throttled by squeezing liquidity to the needy sectors.
November 19: A 10-hour RBI central board meeting decides to set up a panel on the economic capital framework for RBI and directs it give forbearances to small businesses. The Board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI. The Board also advised that the RBI should consider a scheme for the restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million, subject to such conditions as are necessary for ensuring financial stability. The Board, while deciding to retain the CRAR at 9 percent, agreed to extend the transition period for implementing the last tranche of 0.625 percent under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of the RBI.
December 5: Governor Urjit Patel refuses to answer queries on frictions between RBI and government despite reports of a truce between the two.
December 10: Patel resigns, citing personal reasons.
The tussle between the government and yet another autonomous institution
Taking over from Dr Rajan, Dr Patel, from his 19th floor corner office on Mint Road, saw through the badly implemented demonetisation decision for which the RBI took some heat, and resolutely held the fort on all other aspects that cropped up during his tenure. Soon after Dr Rajan took over as governor amid soaring inflation and a weakening currency, he decided to set up a committee to review the monetary policy framework. And his "inflation warrior," then Deputy Governor Urjit Patel was his man to head that committee. It was this committee's recommendations which laid the framework for consumer price inflation (CPI) to be made the nominal anchor policy. It was this committee's recommendation that the appropriate flexible inflation target for India lie in the band of 4(+/-2) percent and that a glide path should be followed to reach that level. This committee also recommended the Monetary Policy Committee framework that has now been adopted by India.
When Dr Rajan exited as Governor, the transition to Dr Patel was relatively smooth considering the similarity in their approach to the problems faced by the RBI and the Indian economy. He continued Dr Rajan's work of cleaning up the banking sector and ensuring that mistakes of the past credit cycle were not repeated. Weak banks were restricted from lending under the Prompt Corrective Action (PCA) framework. A February 12 circular instituted a rule-based way to deal with stressed assets. We will return to the achievements of Urjit Patel during his two year tenure in a bit, but let's focus now on what issues the central bank and the central government butted heads.
The Indian Express reported that the RBI thought of this attempt by the government as adversely impacting macroeconomic stability. The government, in turn, argued that the current framework was adopted by the RBI in July 2017 "unilaterally" as government nominees were not present during the meeting when this decision was made. The government believes that the RBI has overestimated its capital reserves requirements resulting in an excess capital of 3.6 lakh crore rupees which it sought to recapitalise public sector banks, and to help expand their loanbook and come out of the PCA framework. Several commentators have also pointed out the obvious - the government wanted to use these reserves to peddle voter-appeasing schemes ahead of 2019.
The RBI, the government claimed, had been "conservative" and at times even "arbitrary" in transferring the interim surplus. The Express noted, " In 2017-18, the RBI transferred a surplus of Rs Rs 50,000 crore to the government (comprising an interim transfer of Rs 10,000 crore), up from Rs 30,659 crore in 2016-17, but lower than in the previous three years. The government believes that, when compared with global central banks, the RBI holds much higher total capital as a percentage of its total assets (at about 28 percent). Countries including the US, the UK, Argentina, France, Singapore maintain much lower capital as a percentage of total assets, while the same for countries including Malaysia, Norway and Russia are much higher than India."
In his now famous speech, Viral Acharya reiterated the point that raiding the capital reserves of the central bank created no new government revenue on a net basis over time, and only provided an illusion of free money on the short term. He cited the example of Argentina where a transfer of $6.6 billion of its central bank's reserves to the national treasury, sparked off "the worst constitutional crises in Argentina" and led to "a grave reassessment of its sovereign risk." It was in this context as well as in the context of the government's attempts to undermine the autonomy of the RBI that he used his now famous phrase: "potentially catastrophic."
No surprise then that the shares of banks and NBFCs rebounded on December 11 in the hopes that the successor to Urjit Patel may re-examine the PCA framework and special liquidity window. Nifty PSU Bank rose 2.3 percent. It has continued its rally into today. At the time of writing this, the Nifty Bank was up 1.57 percent, with Indiabulls Housing Finance one of the top gainers of the day.
The Economic Times noted, " The government had sought a special refinance window for mutual funds, NBFCs and housing finance companies; a facility for banks to raise $30 billion overseas; a relaxation in the limits on corporate bonds for foreign portfolio investors; and easier mandatory hedging requirements for infrastructure loans of less than 10 years. In the interest of long-term financial health of the country, the RBI does not want to ease controls to help the government achieve short-term goals of economic growth.
Those were just some of the issues where the government and the central bank were at loggerheads, and most of them have not seen a resolution. A combination of these factors may have contributed ultimately to the resignation of Dr Urjit Patel.
The accomplishments of Urjit Patel
After the departure of Dr Raghuram Rajan, famously thought of as confrontational and as one who didn't shy away from making his voice heard, it was widely thought that Dr Urjit Patel, reticent and non-confrontational would be the right fit for North Block. But as Dinesh Unnikrishnan pointed out on Firstpost, "Ironically, from being the reclusive, low-key government’s favourite at one point, Patel turned into its biggest challenger in recent times. This is the first explicit resignation by an RBI governor for the cause of RBI’s independent existence and credibility. One must note that even in his exit, Patel showed grace with no direct attack on the government by cleverly avoiding any mention of the government in his resignation letter, leaving the public to read between the lines. This was the final option and perhaps the only option left to Patel to save the institution from turning into a puppet of the government."
While we have discussed the achievements of Dr Patel on another piece that we did at his completion of two years in office, we would do well, as Unnikrishnan says, to remember that Dr Patel is the chief architect of India's retail inflation-centred monetary policy. On top of his list of successes would also be his continuation of the NPA clean-up process started by his predecessor Dr Raghuram Rajan.
The Monetary Policy Committee (MPC) framework which was introduced within a month of Patel taking office to collectively decide on interest rates has been generally successful in achieving its primary objective of keeping inflation under a pre-stated target.
Under Dr Patel, the apex bank worked on new guidelines for tackling cyber-security concerns and pre-emptive cautionary warnings and directions on evolving challenges posed by cryptocurrencies.
Besides, the RBI also set up a new Enforcement Directorate as part of broader plan to develop a rule-based approach to deal with breaches of law, rules and directions and to make the enforcement process stringent and consistent.
As the financial health of banks had deteriorated over the last few years, the RBI has revised norms for prompt corrective action and promptly imposed them on some public sector lenders. The new framework encourages banks to eschew certain riskier activities and focus on conserving capital so that their balance sheets can become stronger.
While industry estimates peg overall NPAs at over Rs 10 lakh crore, the RBI has said the stressed assets (gross NPAs plus restructured standard advances) remained elevated at 12.1 percent of gross advances at end-March 2018.
The RBI has also introduced measures to make banking easier for public, including for senior citizens and differently-abled persons.
It has launched an aggressive awareness campaign on banking regulations and against frauds, and introduced a structured communication channel called ‘Mint Street Memo’. It got global praise for its communication activities from the Bank for International Settlements.
While his general demeanour of reticence, often causing the markets to guess what he might be thinking, was often a cause of consternation, Dr Patel's voice was heard loud and clear in his exit. To preserve the sanctity of the RBI, Dr Patel made a quiet exit, but a loud statement.
The Successor
Urjit Patel, the man who received a considerable amount of flak for not speaking up during demonetisation was also the man who revealed that 99.3 percent of the notes banned by Modi had ended up in bank accounts, confirming that Modi's drive had proven to be a disaster. In 2018, six months before the general election, it should come as no surprise that the man who has been chosen to take over from Urjit Patel is Shaktikanta Das, a former economic affairs secretary, and the key man behind the planning and execution of demonetisation. As we might all recall, his was the face we saw across media, aggressively defending every aspect of the controversial move. Das was also behind rolling out of GST. The extraordinary speed with which his appointment was made has certainly raised a few eyebrows.
With Das, it is also the return of the bureaucrat on Mint Street. After two PhDs in economics at the helm of affairs at the central bank, it is now the turn of MA in history, and retired IAS officer, Shaktikanta Das. (Let's not forget that he also did a one-week advanced financial management course from IIM Bangalore and one week development banking and institutional credit course from the NIBM.)
A retired 1980 batch IAS officer of Tamil Nadu cadre, Das has previously been the Union Economic Affairs Secretary. After his retirement from the IAS, Das was appointed a member of the Fifteenth Finance Commission. He was also appointed as India's Sherpa to the G20.
Addressing the media on Wednesday, 12 December, newly appointed RBI Governor Shaktikanta Das said, “Every institution needs to have integrity and autonomy but also needs to be accountable.”
“I will try and uphold professionalism, core values, credibility and autonomy of this institution. It’s an honour and great opportunity to serve RBI. I will try my best to work with everyone and work in the interest of Indian economy,” he added.
He also said that he will convene a meeting of MDs and CEOs of public sector banks on Thursday in Mumbai.
When IAS officers get sent to Mumbai to head the RBI, the perception is often that they are Babus with no real understanding of how the RBI works. Firstpost notes, "But as former governor D Subbarao once famously said, somewhere along the flight from Delhi to Mumbai, the government bureaucrat transforms into an RBI governor, ceases to be a government man and begins the fight for the central bank."
As ET noted, "In October 2015, Das was nominated to the Central Board of Directors of the RBI. This was to signal an easing of what had sometimes been a tense relationship. Earlier, the finance ministry had downgraded its representation on the central bank’s board to the level of additional secretary." As someone who has worked on both sides of the increasingly tension-ridden fence, Das brings considerable experience to the job. But his to-do list from Day 1 already looks daunting. Will he allow the government to take a bit of the central bank's capital reserves to bridge its ballooning deficits? Will he move to relax the PCA framework? Will he allow the government to change the way the RBI operates by installing a Board-monitored mechanism?
The answers to these questions will also answer the all-important one - Will he help the RBI maintain its autonomy and in the process uphold the integrity of a temple of modern India?
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