It is certainly bad optics for the Modi Government when a specialist economist chooses to put in his papers a mere six months before the end of his three-year term. Viral Acharya, Reserve Bank of India’s Deputy Governor, has conveyed his inability to continue post-July this year. Even if it is a case of Acharya seeking to go back to his university job in New York in time for the start of the new academic year, and to be with his New York-based family, it will be hard to counter the general impression that the government has a problem retaining the services of outside experts. Seven months earlier, RBI Governor Urjit Patel had resigned following public differences with the Finance Ministry. At the time, apparently, the provocation arose when the government threatened to invoke Section 7 of the RBI Act to dictate what it wanted the central bank to do.
This had never been done before, though public differences, even recriminations between the RBI and successive governments in New Delhi are well-known and an integral part of the history of the bank. Truth be told, before the advent of the coalition governments at the Centre, RBI was treated as an adjunct of the Finance Ministry, virtually ordered about by a mere joint secretary dealing with the banking section. Manmohan Singh, you can well imagine, was one such pliant governor during the Indira Gandhi years. So, to put in perspective, governments have a natural tendency to want the RBI to do its bidding, while professional managers on Mint Street tend to resist only to give in reluctantly. Patel’s predecessor, Raghuram Rajan, also from the US academia like Patel, was denied a second consecutive term, though he had publicly expressed willingness to continue. Defying the mould, Rajan probably was the only RBI head who had gone out of the way to acquire a public persona, giving lectures and freely expressing his views on matters which, strictly speaking, were far from his official remit. The case of Patel was somewhat different.
He had serious differences over the quantum of capital reserves that the central bank should hold. Revenue-scarce finance ministers have always scouted around for funds from wherever they can get them. Patel was unwilling to part with even a portion of the reserves, which by the standards of most central banks globally, were far in excess of the emergency buffer required. In this tug-of-war, Acharya riled the government when in a public lecture, while standing in for his boss, he extolled the virtues of autonomy for the central bank and, significantly, warned that erosion of autonomy could result in an adverse impact on the financial markets.
Curiously, when a couple of days later the equity markets actually registered a surge, a senior Finance Ministry apparatchik took a swipe at Acharya on Twitter, mocking him for raising a false alarm. The upshot was the setting up of a six-member committee under the chairmanship of Bimal Jalan, a former RBI Governor, to examine the correct size of reserves necessary to be maintained by the central bank.
In the meantime, in a bid to smooth out the RBI-government relations, a six-member Monetary Policy Committee was constituted by the Modi Government and prescribed the specific task of containing inflation within pre-set parameters. The MPC has worked well and, notably, one of the three internal members from the RBI is Acharya, along with another deputy governor while the Governor is its chairman. Thus far no one has suspected that Acharya was unhappy with its functioning.
The MPC since former Finance Secretary Shaktikanta Das’s appointment as RBI Governor has lowered the basic rate by 0.25 basis points every quarter it has met. The conclusion is unavoidable that Acharya has resigned six months before the end of his tenure due to `personal reasons’ he has cited in his letter to Das. That personal reason being his keenness to join his post as a professor in the New York University and, no less importantly, his family which is settled there in the US. Yet, the impression is hard to counter that the Modi Government fails to retain specialist talent from outside.
Aside from Patel and Rajan, the fact that the Niti Aayog head and a well-regarded economist, Arvind Panagariya, decided to go back to his university professorship in the US rather than continue to guide the broad economic policy direction at home does not reflect well on the Modi Government. Notably, Panagariya continues to be a great supporter of the Modi Government. Optics, let it be said, are important in politics, even if the Government could not have held back the US-based economists against their will.
