India’s Top Central Banker Quits as Government Seeks More Control

By Vindu Goel | December 11, 2018

India’s top central banker resigned Monday after tussling for months with Prime Minister Narendra Modi’s government over its desire to exert more control over the bank’s regulations and tap its reserves to increase government spending.

The departure of the banker, Urjit Patel, came almost a year before his term was to end and sent India’s currency, the rupee, down nearly 2 percent. Concerns about a slowing economy and a sharp spike in oil prices had already caused India’s stock market to give up most of its gains for the year.

“This will give a very bad signal to the Indian markets,” said Sebastian Morris, a professor of economics at the Indian Institute of Management in Ahmadabad. “It establishes beyond a doubt that Mr. Modi cannot get along with anyone with an independent mind.”

Officially, Patel said he was resigning for “personal reasons.” And Modi posted a message of praise for the economist on Twitter, saying, “Dr. Urjit Patel is a thorough professional with impeccable integrity.”

But tensions between the Reserve Bank of India, which Patel led, and the government had grown to the point that one of his deputies, Viral Acharya, gave a speech in October warning of the perils of too much government interference.

“Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” Acharya said then.

Modi’s government had threatened to invoke an obscure legal provision to force the central bank to adopt certain policies.

In particular, the government sought to soften the central bank’s rules for new lending by state-owned banks, which are struggling to manage their portfolios of previous bad loans.

Modi had also sought a transfer of some of the central bank’s $132 billion in cash reserves to pump up government spending before elections next May, a measure the central bankers had resisted.

The central bank has been criticized for micromanaging the country’s banks, forcing them to hold more capital than required by international standards, and adopting tough new rules without consultation. Those rules include a recent order that payments processors like Visa and Mastercard store all payment data involving Indians exclusively in India.

Modi’s Bharatiya Janata Party won an overwhelming victory in national elections in 2014, but it has struggled to maintain its popularity amid a rocky economic record.

Unhappy farmers recently marched on the capital in New Delhi and in Mumbai, the country’s financial center, to demand loan forgiveness and higher crop prices. Legions of small shopkeepers and manufacturers have complained about the paperwork involved in one of Modi’s signature policies, the imposition of a national goods and services tax.

Modi’s other major economic policy, the sudden invalidation of paper money in November 2016, has been roundly criticized by economists as causing great disruption to India’s cash-based economy without providing any real benefits. Patel and the central bank were forced to manage the fallout of the move.

On Tuesday, election officials will tally the votes in legislative elections in five states, providing an early indicator of Modi’s re-election prospects next year.

Patel, whose term was to end next September, decided not to wait it out.

“Patel swallowed a lot of bitter pills,” said Arun Kumar, an economics professor at the Institute of Social Sciences near New Delhi. “The pressure from the government was increasing.”

c.2018 New York Times News Service