The resignation of a Reserve Bank of India (RBI) governor is a serious event for the country. RBI has been one of the most trusted institutions so far. Yes, India’s judiciary and election commission are also trusted, but they are constitutionally protected.

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The RBI is the only institution that is entirely appointed and can be dismissed by the executive, but that has historically had the authority to say “no” to the government. Whatever India has achieved by way of the RBI's authority and independence, is no mean achievement. It is the crowning jewel of India’s civil and liberal values, of limited government, a government limited by rule of law.

Today that institution has said it can’t withstand the government’s pressure. This should worry us as Indians.

The resignation of the governor hence ought not to be measured by how much the rupee, or bond prices or stock indices fall. His resignation is a fall in itself. It is a failure of governance, especially because he was appointed by this government.

So what triggered this unfortunate turn of events? Intense pressure from industry and government for sure. The first pressure emanated when the RBI rolled out the February 12 circular that threatened and then actually sent defaulters with Rs 2 lakh crore of assets to the bankruptcy courts. Among them were some highly connected borrowers. When the RBI governor refused to allow exemptions or even literally entertain requests, the government pulled out the never-used power under Section 7 of the RBI Act. It began consultations under the section that could eventually end in the government giving directions to the governor. That was the first big attack.

The other big attack on the RBI was the demand for its capital. While previous governments had made similar demands, it appears this government meant business. The governor resisted again.

Finally came the demand to allow weak banks to lend more risky loans. The RBI had brought the weakest banks under what it calls the prompt corrective action list (an idea first mooted by former governor Reddy). These banks were not allowed to give risky loans, that is, to borrowers rated below A. With the debt markets refusing to trust risky NBFCs, the government became desperate to let PSU banks bankroll the suspect loans of NBFCs. The puritanical Patel again said “no”.

Three letters of consultation under the dreaded section 7 and the governor decided it was time people take the call. Not he alone. He let his deputy governor to write out his thoughts and speak them in the now well known AD Shroff memorial speech where the RBI as an institution laid out the friction points before the nation.

An upset government upped the ante. Politically loyal persons were appointed to the RBI board, and the government decided that every Act of the RBI shall be shadowed and supervised by the board. That was approximately the shape of things to be legalised at the upcoming December 14 board meet. That probably was the last straw.

The governor probably took the call that his service conditions have been changed midstream by the government. He was appointed as the governor of the central bank but was now probably being reduced to be the chief operating officer of a board which certainly was no expert in financial sector mechanics or nuances of economic policy. It was by constitution, a sounding board for needs and problems of society at large. It was by convention and law strictly an advisory board.

Faced with such an impossible-to-accept change in service conditions, the governor resigned. He has chosen his date responsibly. Not when key state elections were on. But a couple of days after the last ballot was cast. It was responsible timing. In any case, he had to do it before the unacceptable agenda of the December 14 board meeting.

Patel’s six year stint at RBI had many pluses, the best of which was the setting up of the monetary policy framework and an inflation targeting monetary policy committee. Patel also moved single-mindedly against bad loans packing the top forty defaulters to the bankruptcy courts and setting the ground for sending more such defaulters.

But Patel was probably one of the unluckiest governors. Firstly, he faced a more strong sovereign with a 335-seat majority, something no governor has faced since the liberalisation and marketisation of the financial sector since 1991. Secondly, he was the unfortunate incumbent when the draconian demonetisation of 86 percent of the currency was unleashed by the government. He was also unfortunately in office when a 7-year old fraud came to light at PNB, after Rs 13,000 crore had been robbed from the bank. Finally came the IL&FS default which crippled the debt mutual funds, the debt markets, the NBFCs and the realty sectors.

Patel’s RBI realised, but could not say, that the debt problem of 2018 was large because of reckless lending to the NBFCs in 2017, and that reckless lending was in turn because of the surplus liquidity unleashed by demonetisation. Patel refused to sin once again to correct the earlier sin of demonetisation. He refused to give a lender-of-the-last resort facility to NBFCs. That 'no' again could have been over-ruled by the board on December 14. Hence, he had to quit before that meeting.

Patel resigned after two years and two months in office. He resigned because he had the conscience and the courage to say “no”. This is a pyrrhic victory for the government. If it gets a perceived yes-man, it can do irreparable harm to itself, the economy and to the country. It needs to actually choose someone who is perceived as having the courage to say 'no'. It needs to keep its hand off the RBI at least till the general elections are done.

The government's only chance is if it can be morally upright and politically responsible about the choice of the next governor. But if it had the sagacity to do that, why would it hound out the last one?

First Published:Dec 11, 2018 6:16 AM IST