Demands for interim dividend transfers from the Reserve Bank of India (RBI) to the government effectively result in a creeping monetisation of the deficit, former RBI deputy governor Viral Acharya said on Tuesday. The practice, which had begun a few years ago as a means of resolving a short-term problem, is now ballooning into a perennial problem, Acharya added, speaking at a session of Indian Express Idea Exchange.
“These demands can be considered as coercive monetisation of government’s expenditures and it reflects, in essence, what I’m trying to argue in the book that the fiscal situation is very stretched and they are constantly turning to the central bank to solve their problems. Every year it looks like a short-term problem, but now it has become a perennial problem,” Acharya said, referring to his book ‘Quest for Restoring Financial Stability in India’.
He said that this tendency to raid RBI reserves had existed even before Covid appeared on the scene. “We had an initial condition on the fisc which wasn’t that much on a consolidation trajectory as the FRBM targets we had okayed,” Acharya said.
“In the letter of the law, this decision resides with the board of the central bank, it’s their call in the end how much surplus gets transferred, but of course one would like that certain forward-looking needs to provision on the balance sheet of the central bank are factored in, as presumably the Bimal Jalan committee must have recommended,” Acharya said.
The central board of the RBI is set to meet on August 14 and among the items on the agenda of this meeting are the approval of the RBI’s balance sheet for 2019-20 and the question of dividend transfer to the government.
Acharya pointed out that the transfers from the central bank since former governor Raghuram Rajan’s term have been very large, among the highest in the recent history of the RBI. Former governors and deputy governors have generally not been in favour of transferring 100% of the RBI’s profits, as was done in some years.
“So we have to see whether the Bimal Jalan (committee) report and their recommendations are adhered to in good faith and in spirit as well as the specific ratios that they have mentioned. If they are not, then it could be a sign that there is a pressure for a sort of creeping monetisation of the deficit in one guise or the other,” Acharya said. Whether it is called an interim dividend, explicit deficit monetisation or a relaxation of ways and means advances (WMA), but ultimately it would be akin to a recognition of the fact that fiscal expenditure is too high and Fiscal Responsibility and Budget Management (FRBM) Act targets are being violated.