Saturday, May 18

Reserve Bank Refused Centre’s Demand For Rs 2-3 Lakh Crore: Reveals Former RBI Official

Edited by Meenu Mathew
Reserve Bank Refused Central Govt's Demand For Rs 2-3 Lakh Crore, Revealed Former RBI Governor (Image: www.twitter.com/Dharma4X/status)

The Reserve Bank of India (RBI) refused central governments demand for Rs 2-3 trillion (2 lakh crore – 3 lakh crore) from its balance sheet in 2018 for pre-election expenditure ahead of Lok Sabha polls in the following year, said former RBI deputy governor Viral Acharya. And this sparked the issues between RBI and Union government, he added.

Mr Acharya made the disclosure through a prelude added to the updated version of his book, Quest for Restoring Financial Stability in India published by Penguin Random House India, reported the Mint on Tuesday. The book was first published in 2020.

Mr Acharya flagged the issue first in his speech at the A.D. Shroff Memorial Lecture in 2018. The current announcement has come at a moment amid calls for increased government spending before the general and assembly elections due in 2024.

“Creative minds in the bureaucracy and the government” devised a plan to transfer substantial sums accumulated by RBI during tenure of previous governments to the current government’s account, said Mr Acharya in the prelude to his book.

It is an RBI routine to reserve or save a part of its profit, instead of distributing it all to the government. According to Acharya, in three years leading up to demonetisation, the central bank has made record profit transfers to the government.

But during the demonetisation year, the transfers made to the Centre were seems affected by the high expense in currency printing. And it eventually led the central government in 2018 to escalate their demands ahead of 2019 polls.

“It was effectively an attempt to ensure back-door monetisation of fiscal deficit by the central bank. Why cut populist expenditures in an election year …. when the central bank balance sheet can be raided and surging fiscal deficits essentially monetised?”, he said in the prelude.

He also put remarks on certain other reasons why centre exerted pressure on RBI. One is the government’s failure to raise divestment revenues. Divestment shortfall sought to be met via transfers from the RBI is an annual ritual now, he said.

When RBI did not comply with the requests for the transfers sought, a proposal within the government suggested invoking Section 7 of the Reserve Bank of India Act, which allows the government to issue ‘directions to the bank as it may, after consultation with RBI governor, (to consider it) necessary in the public interest’, Mint quoted Mr Acahrya.

He stated, that the invoking of Section 7 “was an unprecedented move” in the 80-year history of RBI. Although then RBI governor Urjit Patel had cited personal reasons for resigning nine months before the completion of his three-year term, it is indicated the move came amid the central bank facing pressures on its autonomy from the government, says reports.

Mr Acharya also argued that matters of “public interest” like this should be openly debated rather than discussed behind closed doors.

Viral V. Acharya is an Indian economist who was appointed as Deputy Governor of Reserve Bank of India from 2017 to 2019. He also served as a member of the advisory council of the RBI Academy and was a member of the Academic Council of the National Institute of Securities Markets, Securities and Exchange Board of India since 2014.

“This is professionalism of the highest order, which hopefully will not be compromised in the run-up to the 2024 Lok Sabha elections”, wrote MP and General Secretary in-charge Communications of Indian National Congress, Jairam Ramesh, appreciating Mr Acharya on X (formerly Twitter).