Is Urjit Patel's return to policy space a sign of reconciliation with govt?

Urjit Patel, former Reserve Bank of India (RBI) governor, is back in the policy space. This time as the chairman of the autonomous but government-affiliated National Institute of Public Finance and Policy (NIPFP).

In many ways, this is Patel’s home ground. Two of his papers, co-authored with Willem H Buiter, on fiscal policies and deficits were acclaimed by economists. As chairman of NIPFP for the next four years at least, Urjit Patel, 56, could offer the government advice on the way out of the present fiscal mess and an economic slowdown that is bordering on recession.

Some suggest that the role of the chairman at NIPFP is limited to chairing the board meets, while the show is actually run by a director, but the reality is more nuanced. It is the board that gives the institution its direction, selects infrastructure areas to stress, recommends projects, and is responsible for senior appointments. Besides, there is nothing to stop Patel from coming up with his own original policy ideas and research.

Patel’s appointment at NIPFP certainly raised eyebrows, just as his abrupt departure from the RBI did in December 2018. He had just completed a little more than two years as RBI governor and, with his deputy Viral Acharya, was seemingly at loggerheads with the government on various issues, including his stance on keeping rates high even when inflation was collapsing, eventually falling below 1.5 per cent. Patel and the RBI under him developed a reputation for inflexibility. He also made some powerful enemies for introducing strict insolvency rules that virtually meant a business could fold if the company defaulted on its obligations even for a day. Patel’s RBI also snubbed the government by not sending any representative at the crucial meeting on the power sector crisis.

Many say the public display of rivalry between the government and the central bank undermined RBI’s prestige. Part of the later criticism stemmed from his ambiguous role during demonetisation, one of the Modi government’s biggest policy interventions thus far. A few months into the job as RBI governor, Patel neither tried to justify this draconian step, nor did he seek to distance himself from it.

His steadfast refusal to oblige the government with a reserve transfer is said to have led the government to finally activate the first fuse of the “nuke clause,” Article 7, in the RBI Act, which directs the central bank to do what the government wants it to do. It was an unprecedented event.

Patel may have decided to leave without facing the ignominy of the final act. His successor, former bureaucrat Shaktikanta Das, has chosen a less confrontational approach to the issue, so the article was never fully triggered.

Unlike his predecessor Raghuram Rajan, Patel was conspicuously reticent. Out of office, he did not offer his opinions on the Indian banking system or government policies -- until recently. 

A speech at Stanford University last year, for instance, attracted attention. Pointing out that Indian banks are prone to repeated bailouts because of low capital adequacy, he blamed them for risky lending in high-growth years that caused the current accumulation of bad debt. Then, in April this year, he wrote two forthright articles in the Indian Express: One on the consequences of the government's Covid-19 package and another, more sharply critical, on the monetary policy committee (MPC) where rate actions are taken keeping in mind the outer bound of the inflation target (6 per cent) rather than the median 4 per cent target. He also chastised the central bank for not consulting the MPC before a reverse repo rate cut in mid-April. 

Which raises the question: Does Patel’s appointment signal a reconciliation with the government? If insiders are to be believed, Patel himself was unsure if the government would approve his appointment. He was told that Prime Minister Narendra Modi never had issues with him as a professional. “Frankly, the bad blood between the government and the RBI was because of some ill-advised bureaucrats in North Block,” said a person aware of what transpired in 2018 and with Patel’s appointment now.

While Vijay Kelkar, now 78, wanted to leave the position back in 2018 due to his advanced age, he decided to hold back waiting to find a worthy successor, say people in the know of the matter. He favoured Urjit Patel, just as C. Rangarajan had thought of Kelkar. That’s the tradition with the institute.

But Kelkar would not have recommended Patel without being confident of mustering approvals from the government. The government considers the institute its exclusive think-tank on policy matters, and has heavy representation in the body even as it is officially autonomous.

The fact that the selection was unanimous speaks volumes for Patel’s reputation as an economist. As an observer pointed out, “Patel’s domain knowledge is in public policy, and as RBI governor he was an expert in monetary policy. Who do you think can steer the boat better than Patel through these troubled waters that we are in now?”