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Demonetisation and patriotism?

Summary:
The RBI independence drama is over us once again. The media is full of discussions over how government is trying to undermine RBI independence. The frequency with which this one topic keeps coming is quite something. Perhaps, RBI Governors are judged less based on their macro management but more on whether they cry “we are not independent”. Though, this time the troubles were clearly invited by RBI and its Board. It is quite amazing that experts did not see this coming. It was brewing and was just a matter of time. Yet, experts side mostly with the central bank and blame the government alone. For instance, this piece: When he became governor in late 2016, Patel had the unenviable task of presiding over the aftermath of the government’s demonetization decision, which was handed to him

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The RBI independence drama is over us once again. The media is full of discussions over how government is trying to undermine RBI independence. The frequency with which this one topic keeps coming is quite something. Perhaps, RBI Governors are judged less based on their macro management but more on whether they cry “we are not independent”.

Though, this time the troubles were clearly invited by RBI and its Board. It is quite amazing that experts did not see this coming. It was brewing and was just a matter of time.

Yet, experts side mostly with the central bank and blame the government alone. For instance, this piece:

When he became governor in late 2016, Patel had the unenviable task of presiding over the aftermath of the government’s demonetization decision, which was handed to him as a fait accompli. He could have taken the easy way out and resigned, which would have plunged the process into chaos and made the pain of demonetization much worse than it ended up being.

However, the true patriot that he is, Patel rolled up his sleeves and got the job done. He himself has described this period as almost war-time currency management. It is no exaggeration to say that Patel is the unsung hero of the demonetization misadventure.

Unsung hero? Patriotism?

Resigning would not be an easy way but could have stalled demonetisation in some way. History tells us how other RBI Governors did not agree to demonetisation only for it to go the ordinance way. The onus would then be on the government and they would have to figure a way.

Demonetisation was approved by RBI Board chaired by the very Governor. It is unlikely he never knew anything about this measure. To say it was fait accompli on which he could not do anything is just too much. At that very moment, all the years of hardwork of building central bank independence/ autonomy was lost. We saw the sequence of events around the time to tell us how powers had moved from Mumbai to Delhi.

I mean till date, RBI and its Board have not explained to people why they approved the policy. Even RBI’s Deputy Governor does not even list demonetisation in his famed speech but lists Argentina, wrath of markets and what not. Why not wrath of demonetisation?

If the RBI and its board agree to something like demonetisation without giving any explanation to public, all these issues undermining independence such as PSB regulation, taking payment powers, taking RBI’s reserves is all pedestrian stuff. Most people do not even understand these issues. But knocking cash from their lives affected one and all. Yet has not been explained.

There is a reason why the founders of RBI fought so hard for composition of RBI Board. They knew how institutions are to be designed so that governments are not allowed to get away with any policy. Unfortunately, all these lessons have been long lost.

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Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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