Since his appointment in 2016, Urjit Patel has been what you might expect from a central banker: cautious and quiet, a man who picks his words with care. The last few weeks could hardly have been more different for the Reserve Bank of India governor.
A blazing row broke out between the bank chief and his counterparts in India's government last month. On the surface the focus was on threats to the bank's independence, which prompted rumors that Patel might resign. Underneath, though, it reflected a tough new RBI line on the festering debt problems that infect India's bank and corporate sector -- a fact which should earn him applause, not opprobrium.
The discord broke out into the open when Patel deputed one of his deputy governors, Viral Acharya, to give a fiery speech in late October accusing Prime Minister Narendra Modi's government of meddling in the central bank's internal affairs, with "potentially catastrophic" effects. Acharya talked darkly about Argentina's 2010 financial meltdown, partly prompted by its government raiding the central bank's coffers. The hint about India's own possible future was hardly subtle.
There are a number of oddities here, the first being how out of character it was for Patel to sanction such a public move. His high-profile predecessor Raghuram Rajan was in effect sacked as India's central bank head in 2016, after serving just one term, because his outspoken style ruffled feathers in New Delhi. TheYale-educated Patel seemed to learn this lesson. As governor he spoke rarely and said little of interest when he did.
A few days after Acharya's speech, however, India's media reported that New Delhi had previously threatened to use a previously little-discussed rule allowing the government to dictate terms to the bank "in the public interest." It was the threat of this nuclear option -- known as Section 7 of the Reserve Bank of India Act of 1934 -- which pushed Patel to reply in kind.
The row's causes were unusual too. Monetary policy prompts natural frictions between governments and central banks, with the former keen on rate cuts and the latter prone to worry about inflation. India is no different. But its current disharmony draws on deeper issues. One is the threat of a mooted Argentina-style raid on a portion of the RBI's 3.6 trillion rupees ($49 billion) in reserves. Another involved moves to set up a new regulator for digital payments -- an area the central bank wanted to keep for itself. Most important has been belated RBI moves to tackle indebtedness.
Large swathes of India's banking and corporate sector are still suffering a prolonged hangover from a speculative infrastructure bubble more than a decade back. In February, the RBI introduced more stringent rules for companies that failed to repay loans. It then placed close to a dozen struggling state-backed banks under what is called "prompt corrective action," in effect banning them from new lending, while also removing the heads of three major private sector lenders for regulatory infractions.
All this should have been warmly welcomed by a prime minister originally elected on a ticket of cleaning up the economy. But perversely it spooked the government. India's economy roared along at above 8% in the most recent quarter, while retail inflation of 3.8% is low by any recent historical standards.
Still, Modi's team fear Patel's actions will now choke off credit, denting growth ahead of national elections next year. Higher oil prices will also push inflation up closer to 5% next year, according to the International Monetary Fund. The RBI's governor is being doctrinaire at a dangerous time, his critics say. He should back off.
Sadly almost all of this is wrong. Rather than acting too hastily, India has put off corrective action on bank and corporate debt for much too long. Patel's decision finally to swing into action is overdue. Were Modi's government to have done more itself, the RBI might well not have to step in.
To be fair, New Delhi has brought in a reasonably successful new bankruptcy regime, which shows signs of forcing moribund industrial companies to sell assets. But it has done little to reform the moth-eaten state-controlled lenders that dominate its banking system, which will mostly be in a worse condition at the end of Modi's term than at the start.
Tougher RBI action may indeed curb credit growth, especially at a time of turmoil in India's shadow banking sector, following the recent collapse of a major non-bank lender. But this is not a reason to put off reforms. At any rate, having done so little over the last four years, there are few signs Modi will suddenly bring in much bolder banking measures if he is reelected next year.
Worries about the central bank's independence are hardly misplaced either. The threat that Modi considered deploying Section 7 was alarming enough. But a few months ago his government was also widely panned for appointing S Gurumurthy, a firebrand Hindu nationalist thinker, to a position on the bank's board for which he had few obvious qualifications.
The current row may well now calm down. India's finance ministry put out a vaguely conciliatory statement last week, saying it did in fact respect the RBI's independence. Many viewed this as taking Section 7 off the table. Patel has not yet resigned, so he probably intends to stick it out.
Still, the worst lesson India's central bank chief can learn from this grim episode is the need for renewed caution in pushing financial restructuring. RBI governors traditionally get two terms in office. Given all the bad blood, Patel may end up with just one. This would be a shame, but it could also be liberating. Over recent months he has acted like a man with little to lose. If he went quiet again, the only loser would be India.
James Crabtree is an associate professor in practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is author of "The Billionaire Raj."