India's Not-So-New Central Banker
The Indian government’s decision to elevate a well-respected deputy governor at the Reserve Bank of India to become the country’s next central banker is, frankly, a bit of a relief. The naming of Urjit Patel comes after months of quite unnecessary drama -- first over whether current RBI chief Raghuram Rajan and the government were getting along, then whether Rajan would be granted an extension, next whether he would quit in irritation and finally over who would replace him.
There’s a more important reason for relief as well: Choosing Patel suggests that the government supports or at least is content to continue with Rajan’s policies at the RBI, some of which Patel helped to develop and implement. Patel led the team that worked out how to implement inflation targeting in India: It was on the basis of his report that the RBI and the government agreed earlier this year that consumer price inflation would henceforth be the central bank’s sole target.
Rajan and the government often disagreed over monetary policy. The RBI chief was, in particular, criticized by lawmakers for keeping Indian interest rates “too high” -- a suggestion he’s quite sharply dismissed. There was every reason to fear the government might seek out a more pliable successor. But even though Prime Minister Narendra Modi probably wouldn’t have settled on Patel if he didn’t think Rajan’s deputy would at least listen to arguments in favor of lower interest rates, expectations of speedy cuts should probably be abandoned. Patel himself produced the target of four percent consumer price inflation -- CPI currently tops 6 percent -- so it might not be easy for him to abandon it.
Why Patel, then? Naturally, he’s more than qualified for the job, but so were many of the other candidates whose names were doing the rounds. The need to stress continuity -- especially given the dismayed reaction to Rajan’s departure -- might have something to do with it. The next governor will also have to make the case for the RBI’s decisions without Rajan’s “rock-star” influence over the media, so it helps that Patel has built relationships in multiple fields. The policy world will be comfortable with him: He’s worked at the International Monetary Fund, the Indian Finance Ministry and at the Brookings Institution. Finance knows him: He’s been on the board of the commodity exchange MCX and served as an executive director at India’s best-known infrastructure finance company, IDFC. Unlike Rajan, the private sector is familiar with Patel, too: He’s been an adviser at Boston Consulting Group and worked for India’s largest conglomerate, Reliance Industries Ltd. And perhaps most importantly as far as Modi is concerned, Patel’s from a Gujarati-speaking background and was for years a director at Gujarat’s state-controlled natural gas company GSPC, often called Modi’s favorite public-sector firm.
Indeed, Patel is such a natural fit for the job, it’s puzzling that naming him took so long. The delay is another reminder that the process of choosing an RBI governor -- or, for that matter, granting him the conventional two-year extension that Rajan didn’t receive -- should be institutionalized, rather than left up to the finance minister and the prime minister with minimal outside consultation and input. Some have argued that Modi should have complete liberty to pick members of his economic team as he sees fit. But the monetary authority isn’t part of the prime minister’s team. After all, national leaders like to spend money, while an inflation-focused central bank isn’t supposed to make spending money easier.
Promoting fiscal discipline will be one of Patel’s first tasks. In the early 2000s, when India passed landmark fiscal responsibility legislation, Patel -- in collaboration with Willem Buiter, now at Citigroup -- wrote a paper that was generally gloomy about its prospects. “Fiscal virtue,” they argued in 2006, “cannot be legislated. It has to be implemented and enforced.” Patel now has the chance to put those words into action.
The other big task for the new RBI governor is to complete Rajan’s unfinished agenda of forcing India’s state-owned banks to be more efficient and transparent. In that same 2006 paper, Patel and Buiter had harsh words for India’s “lazy” banking sector: “Banks in India have curtailed their credit creation role and have, if anything, intensified their role of predominantly being passive conduits for resources rather than active risk management intermediaries that offer appropriately priced capital to firms.” They also highlighted the systemic risk to the banking system that lax regulation was causing -- well in advance of the banking near-crisis that India faces today. Like Rajan, who made his name predicting the 2008 housing crash, Patel deserves some credit for prophecy.
Rajan came into office with a reputation as a stern critic of crony capitalism, as well as a prophet of crisis. That helped lend him credibility, and his actions at the RBI largely followed on from his previous work. India should hope for the same from his successor.
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