The resignation of the governor of India’s central bank sends a clear indication about the erosion of institutional autonomy under the Modi administration

(Image source- Reuters)

The rumours had been swirling for the past few months. The governor was on his way out.

The Reserve Bank of India (RBI) and India’s central government, aiming for a big play before general elections next year, had been at loggerheads over a number of things: the RBI’s surplus reserves, credit to small businesses, the stringency of the Prompt Corrective Action framework, the governance of state-owned banks and special funding for non-banking financial lenders.

Caught in the crossfire were the governor of the central bank, Urjit Patel, and his deputy, Viral Acharya. The latter was more outspoken about the threats to the RBI’s independence when it came to making decisions about the economy. Meanwhile, the former maintained a dignified silence that characterised his two-year tenure, which commenced shortly before the Modi administration’s demonetisation initiative in November 2016.

When Patel announced his resignation yesterday, citing the obvious “personal reasons,” it took everyone by surprise, not least of all India’s Finance Minister. After a compromise of sorts was reached between the two parties last month, it was widely expected that he would stay on as the head of India’s central bank. It wasn’t to be.

The announcement is timely, as it came a day before the results of elections in five states were unveiled, with the ruling party expected to face a number of upsets.

It is also significant, as it lays to rest the debate over the Modi administration’s propensity to wield undue pressure and influence over the country’s institutions and regulators.

The independence of a central bank is sacrosanct in a democratic country. Patel felt it was in his best interest to resign rather than implement decisions that would hurt India’s economy. His resignation, as viewed by his predecessor Raghuram Rajan, is an “act of protest”.

From the Election Commission to the Supreme Court to the Central Bureau of Investigation (CBI), the Modi administration has made its presence felt across most of the country’s statutory institutions. It has systematically undermined them in order to achieve its own aims - a charge it routinely levelled on the previous administration - and has decided against fostering a political environment that encourages disagreement.

In a heartening sign, however, the pushback has been evident, whether its four SC judges holding a press conference to declare a conflict of interest over the Chief Justice’s allocation of cases or the CBI Director Alok Verma deciding to take special director Rakesh Asthana, a favoured pick of the current administration, off certain politically sensitive investigations.

As it searches for Mr Patel’s successor over the next few weeks, the government will have to weather the financial fallout of such a move and could be forced to give in to the RBI’s demands. Moody’s, a ratings agency, has termed the government’s attempts at interference as “credit negative”. Markets will be roiled and investors will be wary as uncertainty over the RBI’s short-term mandate persists. Acharya is expected to stay on, which will instill a measure of confidence.

As the Modi administration deals with a loss of public faith, it now has the gargantuan task of proving that it can respect the decision-making capacity of these bodies, especially one that is responsible for ensuring India’s financial stability. Thankfully, everyone will be watching closely.



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