IN A MEETING convened on September 14, 2018, to review the state of the economy amid a difficult economic situation and considerable strain between the government and the Reserve Bank of India, Prime Minister Narendra Modi lost his cool on the then RBI Governor Urjit Patel and compared him to a “snake who sits over a hoard of money”, former Finance Secretary Subhash Chandra Garg has written in his book We Also Make Policy.
Published by HarperCollins, the book is set to be released in October. After listening to Patel and the presentations and discussions with other government officials including then Finance Minister Arun Jaitley and Principal Secretary Nripendra Misra, for about two hours, the Prime Minister “saw no solution emerging”, Garg noted in his book. Others present included then Railways Minister Piyush Goyal, then Additional Principal Secretary P.K. Mishra, then DFS Secretary Rajiv Kumar, Garg and two deputy governors of RBI, Viral Acharya and N.S. Vishwanathan.
“He (Patel) offered some recommendations—all for the government to take and nothing for RBI to do, besides what it had been doing already,” the former finance secretary said, adding that “his assessment appeared to be that the RBI was not on top of the situation” and was unwilling to do anything meaningful to address the economic situation and resolve its differences with the government.
“At that stage, the PM lost his cool and took on Urjit Patel. I saw him in such an angry mood for the first time. He compared Urjit Patel to the snake who sits over a hoard of money, for being unreceptive to putting RBI’s accumulated reserves to any use,” Garg wrote in a chapter ‘Governor Urjit Patel Resigns’, which captures the circumstances that preceded the resignation of Patel.
“He did some serious tough talking. He brought up many subjects where RBI’s intransigence was hurting India. He also brought up the subject of the surplus retained… He conveyed to Urjit Patel as emphatically as a PM, without issuing directions, to convene a meeting of the board and find solutions for the issues in consultation with Arun Jaitley and the finance team,” Garg said in his book.
One of the contentious issues between the RBI and the government was the surplus transfer of the RBI. “In the board meeting of RBI on August 10, 2017, the first meeting I attended as the RBI Board member, proposed the retention of Rs 13,400 crore of the RBI surplus of Rs 44,200 crore for financial year 2016–17,” Garg wrote. The RBI had communicated that approximately Rs 30,000 crore would be available for transfer as surplus to the government for the year 2016–17. Garg said he had asked for 100 per cent of surplus to be transferred to the Government of India on the lines of previous years.
The government’s frustration with Urjit Patel started on February 12, 2018 when he had come out with an extremely straitjacketed formulation for dealing with the non-performing loans of the banking sector and taking these defaulters for resolution under the IBC (Insolvency and Bankruptcy Code), Garg wrote. Patel eventually resigned as the RBI Governor on December 10, 2018, over policy differences with the government.
According to Garg, in the meeting convened by the PM on September 14, Urjit Patel made a presentation, where his diagnosis was even more alarmist than the prevailing economic situation, and painted a horrible picture. Some of the suggestions Patel gave included, scrapping of long-term capital gains (LTCG) tax, massive scaling-up of disinvestment targets, persuading multilateral institutions to invest in government bonds and proposed to pay up and proposed that the government pay up the pending bills of several companies, including MSMEs, which, in his judgement, amounted to thousands of crores.
RBI’s February 12 circular, a good move for the resolution of non-performing loans in general, created enormous difficulty for banks with regard to the loans given to power-sector companies. On a petition by power-sector developers, the Allahabad High Court directed the government to invoke Section 7 of the RBI Act, which provided for the government to issue ‘directions’ to the RBI governor, after consultation with the governor.
“RBI decided not to work with the government on this. It did not attend the meetings of a committee constituted under the chairmanship of the cabinet secretary to find solutions to the issue,” Garg claimed.
On March 14, 2018, Patel, in a scathing speech delivered at the Centre for Law & Economics at Gujarat National Law University in Gandhinagar, questioned the government’s inability to shed regulatory authority over nationalized banks, leaving RBI with inadequate regulatory authority over the public sector banks (PSBs) compared to private-sector banks. In June 2018, Patel raised the repo rate to 6.25 per cent, due to a potential rise in inflationary pressures to the government’s decision to hike minimum support prices. This was followed up by another hike of 25 basis points in August 2018.
The RBI had also put as many as eight PSBs under the PCA framework, rendering them unable to lend, Garg wrote, adding that pressure was building on the government to put additional capital in banks to the tune of lakhs of crores. On the issue of electoral bonds, Garg said, Patel, after initially agreeing to the proposal of the scheme, wrote to Finance Minister Arun Jaitey, questioning the issuances of bonds by anybody/bank other than RBI. He also proposed that the bonds be issued in digital, not physical mode, Garg said.
This is the second book of Garg. The title of his earlier book is ‘The $10 Trillion Dream’.