The opposition in India has blamed the Narendra Modi government for “ruining national institutions”. Last week, the Central Bureau of Investigation (CBI) seemed to fall apart over severe differences between its chief Alok Verma and his number two Rakesh Asthana, a Gujarat cadre IPS officer known to be close to Modi. The government’s intervention to send both officers on leave was challenged in the Supreme Court by Verma, amid television reportage of Intelligence Bureau (IB) sleuths picked up near Verma’s official residence by his guards, suggesting unauthorised snooping on the chief who was unceremoniously sent on leave.
It seems the country’s security agencies are at loggerheads – not a pleasant sight by any means.
But a far bigger crisis seems to be awaiting the Modi government as it prepares to fight to retain power in 2019. Reports have surfaced of a growing schism between the government and the Reserve Bank of India (RBI) Governor Urjit Patel.
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The differences have now seemingly sharpened and awkwardly surfaced with RBI’s deputy governor Viral Acharya last week lashing out at the government’s interference and emphasising the need for central bank autonomy.
Acharya is close to Patel who played a major role in bringing him as his deputy from his professorial position in New York University.
Acharya has raised the thorny issue of independence of the central bank and its lack of powers to regulate public sector lenders. According to the deputy governor, the use of RBI’s balance sheet has also emerged as a point of friction, as also the attempt to appoint a separate payments regulator bypassing the central bank.
“One important limitation is that the Reserve Bank is statutorily limited in undertaking the full scope of actions against public sector banks (PSBs) – such as asset divestiture, replacement of management and board, licence revocation, and resolution actions such as mergers or sales—all of which it can and does deploy effectively in case of private banks,” Acharya is quoted in the media as saying.
The deputy governor also repeated some points raised by Patel after discovering the Nirav Modi fraud at Punjab National Bank, when Finance Minister Arun Jaitley indicated that while politicians are held accountable, regulators are not.
Strongly hitting out against the government’s constant pressure to relax asset qualification norms, Acharya, while delivering the A D Shroff Memorial lecture, said: “Sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a facade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output.” That is a dangerous scenario for any economy.
In his speech, Acharya extensively referred to the constitutional crisis in Argentina where the government had appropriated the central bank’s reserves, triggering a crisis.
Explaining the reasons for the differences between central banks and the government, Acharya said: “A government’s horizon of decision-making is rendered short, like the duration of a T20 match…There are always upcoming elections of some sort. 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.”
The Acharya fusillade has led to much speculation about Patel’s fate. Unlike in the CBI, the RBI governor and his deputy appear to be on the same page and Acharya would not have spoken out so strongly unless his boss wanted him to.
Which raises the issue that Patel is not destined for an extension beyond his three-year term ending September 2019, if Modi and the BJP return back to power.
Monetary policy has always been seen the exclusive preserve of the RBI and previous governments have not done anything to challenge that. Even though Modi’s predecessor Manmohan Singh was a professional economist and had been an RBI governor, he did not interfere with a strong governor like Raghuram Rajan.
Rajan was expectedly not given an extension by the Modi government for a host of reasons, including his fierce opposition to the ill-conceived demonetisation which, according to the latest report of the Centre for Monitoring Indian Economy (CMIE), has caused a loss of 3.5 million jobs over the last two years.
But now BJP insiders say Patel is proving to be more difficult to handle than even Rajan. But asking Patel to leave now, like CBI’s Verma, may provoke a bigger blowback for Modi in the rundown to the polls when the Opposition is not only crying foul over renegotiation of the Rafale fighter aircraft deal but also over mismanagement of the economy.
Many questions have already been raised after Niti Aayog chief Arvind Panagriya resigned and went back to his teaching job in the US followed by the PM’s chief economic adviser Arvind Subramanian.
Subramanian cited pressing family commitments while Panagriya maintained discreet silence though the grapevine spoke of his huge frustration over failures to push through key reforms.
But no Indian government in the past—not even when faced with the huge crisis of early 1990s—has landed itself in such a thick soup with top finance bureaucrats in the management of national economy. The macro indicators for the Indian economy might look good but many suspect a lull before a storm.