The governor of India’s central bank, Urjit Patel, resigned abruptly on Monday. This is only the fourth time a governor of the Reserve Bank of India has resigned and the first time this has happened in the past 40 years.
Patel’s exit comes after a series of tussles between the Reserve Bank and the Union government over the management of the Indian economy. Over the past few months, the government has put pressure on the RBI to transfer its reserves to the Centre in the hope of closing India’s fiscal deficit. There were other points of friction too: the Union government wanted lending restrictions on state-run banks to be relaxed and hoped to set up a digital payment systems regulator, thus attenuating the power of the Reserve Bank of India. In addition, hit by an economic slowdown, the Modi government wanted easier credit for non-banking financial companies to kickstart growth – something else that the RBI opposed.
Tensions between the RBI and the Union government are not new. But matters have rarely come to such a pass. In October, the Reserve Bank of India’s deputy governor took the dispute public, sharply attacking the Modi government in a speech. This is unusual: in the Indian system, the Reserve Bank of India is not statutorily independent. Patel was himself appointed by the Modi government in 2016. Within a few months of his appointment, he even endorsed Prime Minister Modi’s highly contentious demonetisation of high currency notes. That matters would deteriorate in two years to a poiit where Patel would have to resign shows how badly the Modi government has bungled its management of the central bank.
This is not the only instance of the Modi government messing up economic policy. As the Financial Times pointed out on December 4, much of Modinomics is “grand promises and bombast”. Rather than solving such problems as unemployment and falling farm incomes, the Modi government actually made matters worse by rushing in with demonetisation in 2016 – a move widely seen as a self-inflicted disaster. Months after this, the Union government dropped another shock: the Goods and Services Tax, a complex, centralised tax that wounded India’s small and medium business sector. Former RBI governor Raghuram Rajan noted in November that the two successive shocks had a serious impact on growth in India. “Growth has fallen off interestingly at a time when growth in the global economy has been peaking up,” he noted.
To make matters worse, short-term political compulsions have put pressure on the Union government to mask bad economic news. On Sunday, former Chief Economic Adviser to the Modi government Arvind Subramanian said that the gross domestic product data put out by the Union government was a “puzzle”. Even more bluntly, the Modi government has stopped publishing employment data altogether.
Given India’s poverty and burgeoning population – more than a million Indians enter the workforce every month – economic growth is critical to meeting its challenges. Against this backdrop Patel’s resignation should act as wake up call: India needs prudent economic management not the absurd policies it has been subjected to for the past four years.