Watch out for the next RBI chief Urjit Patel's policies on inflation, exchange rate and employment generation
Next month, Urjit Patel is going to be installed as the 24th Governor of the Reserve Bank of India. He will take over the RBI at a time when inflation is soaring and no concrete outcome appears to be on the horizon with respect to non-performing assets in spite of all the heat and dust kicked up by public sector banks, the Enforcement Directorate and CBI. News of his appointment itself has marginally depressed the Bonds market and stocks have slipped, though it will be an exaggeration to say that are prophets of doom are hyperactive.
On the other hand, news of his appointment has been received with optimism by several economists and leading industrialists. HDFC chairman Deepak Parekh said, “I think his appointment as RBI Governor is an excellent choice as it will bring stability and there will be no uncertainty.” Former RBI Governor C Rangarajan holds Urjit Patel “ideally suited” for the top job at the central bank.
Inflation, then employment generation, followed by exchange rate are the economic verticals that directly affect the common man. It was Patel who as Deputy Governor had introduced consumer prices mainly comprising of food items as the basis for inflation computation, instead of wholesale prices, raising the susceptibility level enormously in view of the impending onslaught of the Seventh Pay Commission Report and the three per cent fiscal deficit target. Inflation had hit 6.07 per cent in July ie 23 month high figure which is going to tie him down to details of inflation micro-management for quite some time.
If Patel can introduce a long-term mechanism to maintain inflation at a tolerable rather ‘vote-friendly’ level in view of the forthcoming Assembly elections in a country inhabited by price-sensitive voters, it shall be a remarkable achievement for the incoming Governor. The Prime Minister and his team shall be able to breathe easy for some time, the common man shall feel more assured of his savings and standard of life, albeit the Opposition may remain considerably distressed busy in burning its depleting calories at Jantar Mantar.
The second parameter that directly affects the common man is employment generation. Without considerable boost to the services and manufacturing industries, employment generation at best remains, marginal. Though India is now an FDI-friendly country with dollars raining in and foreign exchange reserves burgeoning, their transformation into production and employment generation has a long way to go. Though this lean period, rather gestation period, is sought to be covered with tremendous thrust through the Skill India programme to promote self-employment generation, the overall scenario is still fuzzy.
Another important factor is the interest rate cut, which is directly in the hands of RBI, rather the Governor. Interest rate cut will certainly promote industry but it brings in more inflation too. Incumbent Governor Raghuram Rajan has been a bit conservative on this front for which he invited criticism from economists like BJP leader Subramanian Swamy and Nobel laureate Joseph Stiglitz who cautioned him for being too rigid on rate cut. However, Governor Rajan preferred to maintain the status quo on this issue, and there had not been a considerable rise in employment generation so far.
Patel as his team member so far, cannot absolve himself from the bouquets and brickbats for the policy on rate cut that has been followed hitherto. Once he is in command, he is at liberty to exercise his own free will and sense of professional judgement to steer the nation’s economy. There the genius of Patel shall be at its best, advancing cautiously and stoking expectations gently.
Exchange rate is the third parameter that affects the common man that includes international travellers, exporters etc. Patel is not entirely at liberty to tinker with the exchange rate. Exchange rate must be pragmatic to derive maximum advantages with minimum pain. Such a cautious approach shall have to continue till the economy is hamstrung by rising inflation and high rate of unemployment.
Non-Performing Assets of PSBs and redemption of FCNR deposits are other major issues to be encountered by the incoming Governor though these do not affect common man so much. Almost half the NPAs have been cleaned and sanitised while RBI has to gear up for the FCNR ( Foreign Currency Non Residential) deposits.
By appointing him as Governor, the Government has released an explicit message for the people to remain moderate in their expectations. Also, Government have effectively countered the criticism that it did not deserve Rajan by maintaining a semblance of continuity through Patel. He shall have to redefine the RBI’s relationship with the Union Government influenced by newer factors like the constitution of the Monetary Policy Committee allowing him a vote but not veto, being an appointee of Prime Minister Modi or the Finance Minister and the baggage of legacy that he carries alongwith him from the UPA era. It is certainly a tight-rope walk yet Urjit Patel may emerge much stronger from this trial by fire.