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'RBI won't overcome trust deficit'

December 11, 2018 09:47 IST

'If Urjit Patel had resigned after the five-state elections results people would have taken a different view. So this was the right time for him to resign.'
'He rightly resigned as he felt the differences with the government were not getting settled.'

IMAGE: Then Reserve Bank of India governor Dr Urjit Patel addresses a press conference after the monetary policy meeting at the RBI headquarters in Mumbai, December 5, 2018. Photograph: Mitesh Bhuvad/PTI Photo

'On account of personal reasons, I have decided to step down from my current position effective immediately,' Dr Urjit Patel said in a brief statement on Monday, December 10, while announcing his resignation as the Reserve Bank of India governor.

Brief the statement may have been, but this was the first time in four decades that the central bank governor has quit midway through his term.

Speculation over Dr Patel's resignation has been rife for weeks now, from the time the government cited a never-before-used provision of the RBI Act to get him to consider its views on relaxing lending norms for segments such as small and medium enterprises, appropriate size of reserves the central bank must maintain and easing norms for weak banks.

Still, when Dr Patel actually put in his papers, it left more questions than answers behind.

Why did Dr Patel resign now, and not earlier when reports of the differences with the government had erupted?

What exactly was the sticking point that made his throw in the towel eight months ahead of his term's end?

"Instead of creating any controversy the governor chose to resign," Vipin Malik, former RBI director -- all directors are called governors, he says -- tells Rediff.com's Syed Firdaus Ashraf.

Your first reaction to Dr Patel's resignation?

Probably to my mind, there were differences which emerged from the last board meeting of the Reserve Bank, it was a marathon meeting.

After that, there was the second meeting following up on that. The minutes of the last (marathon) meeting had to be approved in this meeting.

There must have been some... --- and this is my opinion as the governor has not given any reason for his resignation, so I presume the minutes which were drafted in the last board meeting, in those minutes again the differences must have emerged in this meeting again.

So instead of creating any controversy the governor chose to resign.

Secondly, I feel the governor had to meet the finance committee of Parliament and had to give reasons for demonetisation.

There would be questions and counter-questions and I feel he did not want to face that, he escaped that part, and therefore he resigned.

 

So as a former RBI governor, Dr Patel won't have to face the parliamentary committee on finance?

He does not need to face the finance committee as he is no longer the RBI governor.

Now it is his second in command who has to respond or whoever takes over as new governor who will reply to the finance committee by seeing the RBI's (demonetisation) files of those times.

Do you think some middle ground could have been found between the government and the RBI governor?

If Patel had resigned after the five-state elections results, people would have taken a different view. So this was the right time for him to resign.

He rightly resigned as he felt the differences with the government were not getting settled.

Resignation by the governor is not in good taste and I think the government was probably asking for (more) lending to small and medium enterprises and micro, small and medium enterprises and he did not do it. He could not do it because already 11 banks were (in debt).

If you recapitalise the banks and bring them up to capital adequacy norms, which is required in Basel 2, only then he would have allowed it.

That could be one big difference between the government and the RBI.

You think the surplus corpus of the RBI which the government wanted led to differences between him and the government and that eventually led to his resignation?

That is 100 percent true.

The government issued directions to the RBI. This is the first time in history that this kind of letter has gone from the government to the RBI asking for the transfer of reserves.

This has happened because the economy is not doing well and probably they (the government) wanted to cover the fiscal deficit part.

But the government denied asking for the reserves.

If the government is denying it, then they must come with reasons for the denial.

I am talking of facts that have come out; I don't know the actual facts.

If the government has facts, then they must come out with facts. Why did Urjit resign?

In my opinion, Urjit had less experience than an RBI governor should have.

I had publicly stated during his appointment that Urjit Patel was not experienced enough to handle the RBI governorship.

He had no banking experience though he had worked in banking, he never worked in rural banking or nationalised banking.

He worked on a paper on the development of certain markets. He was not that much competent as an RBI governor should be.

How will Urjit Patel's role in demonetisation be seen when history is written as he was the RBI governor during the move?

Demonetisation was a disaster as the whole of the money came back.

When demonetisation was announced it was expected that Rs 3 lakh crore will not come back, but in fact much more money came back (in the RBI kitty) than what was in circulation.

And the worse thing is the RBI circulation was itself wrong. So we have not yet counted the notes, but destroyed the notes.

Moreover, in countries like Sri Lanka and Nepal, the Indian currency has still not come back.

Demonetisation was originally a good idea, but its implementation was very bad.

But the governor was right, so why was the government so adamant on this issue? What was the logic?

In an election year these kind of differences and these kind of lending is always there.

As of today, SME and MSMEs are badly affected because of demonetisation. They are the most affected party.

See the exports, the way it has come down. You go to Agra or Moradabad and see (what is happening) there.

There is the current account deficit.

There is the fiscal deficit which has increased substantially.

All these factors are disturbing the government and they want to revitalise the SME and MSME sectors. And that happened originally because of demonetisation. There is no way out.

If in your body your kidney gets affected you treat the kidney, but then due to medicines the liver too gets affected, then the lung too gets affected.

In the same way the economy has got affected. You have done wrong, which is demonetisation, and this is the cumulative effect.

But demonetisation was two years ago. Are you saying it is still impacting the economy?

Demonetisation was to stop black money and it actually stopped the black money.

But to regain that (level of the) economy it will take five more years.

Circulation (of money) takes time as things have been affected very badly.

You cannot make a patient (who is) on medicines run fast suddenly. You have to slowly, slowly, work out.

The markets got affected. The only market that did not get affected was the food market as you have to eat.

How will history remember Urjit Patel?

Urjit Patel was not mature enough to be RBI governor. He had less banking experience, but by giving in his resignation he has covered up that part.

He will go down in history that if you have differences, then it is better to surrender to the controlling authority rather than take them head on.

Do you think the RBI has lost its autonomy and independence forever?

Differences are now so much that the RBI will not be able to overcome the trust deficit.

Syed Firdaus Ashraf / Rediff.com
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