Chief of India’s central bank steps down

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von Hans Dembowski

Business media should finally see through Modi’s mask

Urjit Patel has resigned as governor of the Reserve Bank of India on Monday. He says he did so for personal reasons, but it is no secret that the government of Prime Minister Narendra Modi has lately been putting pressure on the central bank. I think Patel’s resignation should make international business media reconsider the distorted narrative they have been relying on for far too long.

Modi has successfully made foreign journalists believe that economic reforms are at the top of his policy agenda. Even before his party, the BJP, a Hindu-chauvinist outfit, won the general elections in 2014, they praised him for his pro-business stance. The background was that, as the leader of the state government of Gujarat, he had facilitated major industrial investments there. However, Gujarat’s human-development indicators were only average, which showed that Moody’s pro-business attitude did not really translate into higher standards of life. Given that he was chief minister of his state for more than a decade, some of the benefits should surely have trickled down.

What international business journalists tend to neglect, by contrast, is that Modi also has a reputation of Hindu-chauvinism. In 2002, horrible anti-Muslim riots rocked Gujarat. The state government did not stop the Hindu extremists from perpetrating violence even though Modi probably could have made a difference. After all, he is a prominent member of the RSS, the parent organisation of the most important right-wing Hindu organisations, including the BJP. 

In the election campaign in 2014, Modi cultivated a double image. On the one hand, he promised to modernise the economy. On the other hand, he did not deviate from the idea that India should be a Hindu nation, with all minorities and lower castes accepting the predominance of this faith. It is true that he did not promote Hindu chauvinism in a particularly aggressive manner, but the Indian public knows who he is and what the RSS stands for. International observers, however, largely failed to notice that Hindu chauvinism was still very much on the agenda.

India will hold general elections again next year. The atmosphere is becoming tense. Part of the problem is that masses of young people lack prospects. The livelihoods of 90 % of the people still depend on the informal sector and small-scale agriculture. Modi’s government has not delivered on the promise of large-scale, formal-sector industrialisation. Nor has it managed to improve infrastructure dramatically. The new value added tax it introduced makes sense in principle, but it its design is overly complex, considerably increasing the private sector’s bureaucratic burdens. 

The Modi government’s most decisive intervention in economic affairs was “demonetisation” in 2016. Banknotes with high denomination were suddenly made void. The step was supposed to force people to use bank accounts and to eradicate black money. One of the impacts was that the economy slowed down. Foreign journalists pointed out that the policy was unprecedented and problematic, but nonetheless praised Modi’s determination. To years later, it is clear that nothing much has changed about corruption in India.

What the international press did not notice was that demonestisation actually helped Modi's BJP in important state elections a few months later. The reason is that all parties in India used to rely on black money in election campaigns. The BJP was able to prepare for demonetisation, while all the other parties were taken by surprise. In Uttar Pradesh, the most populous state, a BJP leader with a long history of anti-Muslim agitation (but no track record of interest in economic affairs) became chief minister.

Indeed, Modi is a typical right-wing populist who pretends to be personally representing a homogenous nation. Of course, his idea of the nation excludes anyone who disagrees with him. As Jan-Werner Müller elaborated in his excellent book “What is populism?”, leaders of his kind deny the legitimacy of all other political forces. Once in office, they do their best to manipulate institutions and modify legislation in ways that perpetuate their power. Modi’s attack on the central bank fits that pattern. Hindu chauvinists, moreover, are known to hound independent journalists. Even worse, hate crimes have increased, and not only Muslims have reason to feel threatened.

In recent weeks, the Modi government has made it clear that it wants the Reserve Bank of India to adopt a looser monetary policy, which would speed up economic growth in the short run. It also wants the central bank to be more lenient in regard to banks deal with bad assets and give more scope to non-bank financial institutions, many of which are under stress. Demands of this kind fly in the face of what international business papers appreciate. I wonder whether they will now see through Modi’s “reformer” mask. To replace Patel, Modi has now appointed a former finance-ministry bureaucrat rather than a high-profile economist. The prime minister is obviously more comfortable with a central-bank governor who was used to taking orders from the government in his previous career.

As far as I can tell, there actually is a split among the journalists. Correspondents based in Delhi or Mumbai tend to be keenly aware of Modi’s populist arrogance, whereas news desks in Europe or North America tend to stick to the narrative of reforms only proceeding too slowly. They like to express the wish that the prime minister would do more without realising that he has other priorities.

Media coverage matters. The staff of major international development agencies are influenced by business papers for example. Their idea of India is shaped by what the editorial offices produce. Unfortunately, the reformer narrative is strong because it serves wishful thinking. The truth is that it distorts the international public’s understanding of what is happening in Indian politics.

Patel, by the way, was only in office as central bank governor for a little more than two years. Modi picked him, certainly hoping he would be subservient. However, Patel turned out to be a man of principle who did not want to do the government a few short-term favours in order to boost its chances in national elections. In this regard, he proved similar to his predecessor, Raghuram Rajan, a former chief economist of the International Monetary Fund and current professor at the University of Chicago. When Rajan was not reappointed, as he should have been according to Indian conventions in 2016, the international media regretted Modi’s decision – but did not point out that it fit a pattern. Will they notice now? 

Updated on 12 December at 12.30 pm Central European time. 

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