The recent resignation of Urjit Patel as governor of the Reserve Bank of India (RBI) and his replacement with former finance ministry official Shaktikanta Das has been hailed, specially by the Western press, as a a blow to the hard-won independence of the central bank.

It is not, on the contrary, it represents the expression of a trend that finally is reversing on one of the most boldfaced and subtle attempts to demolish the power of the nation state and to try to privatise the tools of economic and fiscal and monetary policy to benefit more and more restricted shares of the population, to the detriment of general interest.

We have to forcefully re-assert a few principles, here, that have been constantly but relentlessly weakened by the neoliberal school of thought since the mid 80’s, and sometimes so successfully, that they pass for currently normally accepted general principles.

The concept of nation state, at his inception, was to be the arbiter of the distribution of the surplus of wealth the nation collectively produced. The state was conceived with a high number of checks and balances that were to guarantee as much as possible that no part of the nation could control the state to the detriment of another part. The state could also, as impartially as possible and democratically, control the tools to redistribute the wealth, the fiscal and monetary policy.

The central bank controls the monetary policy. And, in a sovereign independent state , issues the currency, the lubricant flowing through the engine of economic activity, and one of the tools the state has to implement its policies.

Even before imposing a taxation system, a state has to issue currency to foster economic exchanges to tax. So, monetary policy comes before fiscal policy.

Monetary policy was and remained for long a prerogative of the state, more so if the state had a democratic structure that guaranteed a periodic check that the policies pursued satisfied the majority of their citizens.

Then, subtly, the concept of “independence” of the central/Reserve Bank started to be peddled, such as to distance the state from his primary function to issue the currency, and to hand it over to financial “powers that be” that could resist the “evil” will of the state to increase excessively the currency quantity and cause the dreaded inflation, as reaction to the inflationary ‘70s. This generated the usual problems that happen when you try to grant “independence” as wrongly intended by one too many an economist, that you take away accountability and the ultimate power to rein in the excesses.

This, in the deflationary 21st century, led not only to a dearth of currency, a scarcity of something that, to all effects, can be created at a click of a computer’s mouse, but also to the concept that, if the state needs money to pursue its policies, it has to borrow from the private sector at “market” interest rates, intentionally indenturing the public sector to have to pay higher interests and submit to “the markets” judgement. Till the early 80’s, it was very common for a great number of states to borrow from the Reserve Bank at nominal, if any, interest.

Keep well in mind this, when referring to the RBI case we are going to debate.

Patel’s RBI raised rates during an adverse oil shock, tightened controls on struggling banks, but particularly on banks supporting struggling electricity utilities, against the common sense to support embattled financial institutions in an incoming adverse cycle. It also refused to recognise an incoming liquidity shortage in the banking system, with an unnecessary hawkish stance that induced deflation. For a growing economy like India a 2.3% inflation in November is deflation, well below the central bank’s target of 4%.

All in an election year. Yes, Shaktikanta Das is a former civil servant, but far away from endangering the neoliberal mythology of “independence” , will only reinforce the statement that Prime Minister Narendra Modi is just reining in an excess and at least returning to a form of coordination and dialogue with a tool that belongs to the state by birthright. The monetary policy.

This tool was what was missing to Modi’s policy to attempt to boost India’s potential growth rate, with a new indirect tax reform, removal of internal barriers to trade, a new bankruptcy law and the prosecution of defaulters and several other measure to ease doing business.

Patel’s RBI was, to all effects, hampering growth, obstructing the major objective of the government, create jobs and alleviate poverty.

All the narrative of the neoliberal “independence” partisans was aligned on the RBI hawkish policy, economists and “the markets” squirmed in favour of the “independent” RBI and in favour of their vested interest. The government had to remind forcefully that the monetary policy is a tool of the sovereign state, and does not belong to unaccountable and unelected “powers that be”. Moreover, a democracy has certainly no scope in submitting to “the markets” judgement, as they represent only the opinion and interest of a very limited cross section of the population, the very wealthy, and it is prerogative of the state to regulate the markets if they think the general interest of the nation is jeopardised.

Patel’s resignation was overdue.

Now the balance is restored and the government can submit serenely to the judgement of the ultimate judge. The people and their ballots. If Modi’s policy failed it is only the electorate that will judge it, replacing him if they so see fit.

Shaktikanta Das will guide the RBI with a collegial and collaborative spirit, advising, not imposing, exerting moral suasion, not imposing his policies as alternatives. This will certainly benefit the RBI and the government, and ultimately the nation.

Maurizio Piglia
Maurizio Piglia
Chitro Majumdar
Chitro Majumdar

Piglia is the adviser of RsRL & director of The Guardian Multi Family Office. Majumdar is founder, RsRL and co-founder of a start-up on AI Ethics.

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