Many of us have long argued that, whatever its problems, India is one of the best long-term bets in the world for one simple reason: It has the sort of world-class institutions that can help build and sustain a genuine market economy. Sadly, many of those same institutions are being undermined by the country’s own leaders — most recently the Reserve Bank of India, which Prime Minister Narendra Modi appear intent on subjugating as part of his bid for reelection. Of all people, Modi should recognize that no election victory is worth giving up on India’s best chance at becoming a world-beating economy.
For Indians who share that ambition, it’s been a sobering week. Late on Monday night, news broke that central bank governor Urjit Patel had quit. The news was particularly shocking because it followed a lengthy campaign by the government to bend India’s independent central bank to its will. The Finance Ministry had demanded a series of concessions from the governor — that the RBI stop forcing state-controlled banks to crack down on some big delinquent borrowers, for example. It believed that the central bank was also being too sparing with liquidity: Recent GDP numbers suggest a slowdown in demand, partly caused by a seize-up in India’s shadow banking sector. These “non-banking financial companies,” to use the official Indian term, are crucial lenders to infrastructure and to the small- and medium-sized enterprises Modi hopes will create jobs for his voters.
And, most controversially, the cash-strapped government — facing a tighter-than-expected reelection campaign — wanted to get its hands on the billions of dollars of reserves that the RBI is holding. Modi’s recently-departed chief economic adviser has said this would amount to “raiding” the RBI, and one of Patel’s deputies gave a public speech warning the government against it. But officials don’t seem to have been deterred. Patel appears to have been losing this battle and presumably quit rather than preside over the disappearance of RBI independence.
A leader who wished to preserve the integrity of the central bank would have appointed an independent-minded replacement for Patel, even if one whose views were closer to the government’s. But Modi’s choice was instead an ex-bureaucrat named Shaktikanta Das. Das served as India’s chief economic official right through the currency withdrawal and the botched roll-out of a new indirect tax regime and was a consistent advocate for the government’s claim that Patel and company were keeping interest rates too high.
Das doesn’t have the distinguished academic history of Rajan or even of Patel, who earned a doctorate from Yale and is a distinguished fellow at Brookings. True, bureaucrats have served as RBI governor before and many have grown into the role. In this case, however, there seems little doubt that the quality that Das has been chosen for is his ability to follow orders.
Modi’s choice is doubly damaging because he looks even more desperate for a compliant RBI today than he was last week, following deep losses in state elections. Many in Modi’s Bharatiya Janata Party believe that they are losing farmers and unemployed young people, crucial parts of the coalition that carried Modi to victory in 2014. Modi’s strategists will want to turn on the populist spending tap in response. With Patel watchfully guarding monetary policy and the RBI’s reserves, it would have been tough to find the resources for an election-winning spending push.
Das has vowed to “uphold the autonomy, the integrity and credibility” of the central bank. But, at least for the months leading up to parliamentary elections early next year, the government will expect that he’ll take dictation from New Delhi. Doing so would cause lasting harm to India and greatly reduce its potential future prosperity.
It’s the sort of institutional regression that we haven’t seen for decades. No RBI governor has had to quit in the two-and-a-half decades since India began to liberalize its economy; the history of India’s central bank has been one of ever-increasing autonomy. This is particularly important given that India’s a noisy democracy, with a half-dozen elections a year and politicians who want to win each of them. The RBI’s long-term view and evidence-based policymaking provided a crucial counterweight.
That was the sort of governance that many hoped Modi himself would provide when he won a landslide in 2014. Such political capital, they argued, would allow him to keep his eye on what really mattered instead of worrying about day-to-day survival in power. And perhaps that was true at first: The Modi government itself seemed to cap the RBI’s progression to true independence early in its term when it legislated an official inflation target for the bank, freeing it further from New Delhi’s control. In partnership with someone like Rajan, Modi could have provided the kind of sober and effective economic management that would have shifted India permanently to a high-growth trajectory.
Now, Modi’s India looks like a lot more like any other emerging economy, with a tame central bank and a profligate government that wants to ignore the laws of economics. Modi won once by promising world-class governance. Why does he think voters will reelect him for anything less?