Subhash Chandra Garg’s exit may delay Jalan panel report, offshore bond plan

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Updated: July 26, 2019 7:18:12 PM

Panel may seek opinion of new DEA secy; Garg opts for VRS after Oct 31

Subhash Chandra Garg, power ministry, Jalan panel report, RBI surplus reserves, economic capital framework , FY20 BudgetWith his VRS plan, Garg, a 1983-batch IAS officer from Rajasthan cadre, has sought to cut short his service by around a year from the normal schedule.

With the shifting of former finance secretary Subhash Chandra Garg to the power ministry in a bureaucratic reshuffle on Wednesday, the submission of the Bimal Jalan panel report on the transfer of the RBI’s surplus reserves to the Centre and the government’s plan to hit the overseas markets with its maiden offshore sovereign bond/s worth $10 billion could be delayed, sources told FE.

Garg was a key advocate of the overseas bond issue and also a member of the Jalan panel who had submitted dissenting views on its recommendations after it was clear its review of the central bank’s economic capital framework (ECF) would result in lower-than-expected surplus transfer to the government. The Jalan panel was supposed to submit its report by the first week of August.

Meanwhile, after his abrupt transfer, Garg on Thursday tweeted: “Handed over charge of Economic Affairs today. Learnt so much in the Finance Ministry and Economic Affairs Dept. Will take charge in Power Ministry tomorrow. Have also applied for Voluntary Retirement from the IAS with effect from 31st October.”

With his VRS plan, Garg, a 1983-batch IAS officer from Rajasthan cadre, has sought to cut short his service by around a year from the normal schedule. New economic affairs secretary Atanu Chakraborty, who replaced Garg, took charge on Thursday.

Garg is the first economic affairs secretary in almost 19 years to seek premature retirement (EAS Sarma had done so in 2000 when the Vajpayee government shifted him to the coal ministry). A source said though its report was being drafted after recommendations were finalised in its last meeting on July 17, the Jalan panel might seek views of the finance ministry again. “The panel may want to know if the finance ministry will still go ahead with the dissenting view of Garg or withdraw/dilute it. Jalan may try to forge consensus one last time by convening another meeting with the new economic affairs secretary,” he told FE. “However, even if the finance ministry retains the dissent, it won’t bring in any material change to the panel’s recommendations, as Garg’s was a minority view.”

As for the offshore bonds, sources had earlier said these papers could be issued only after the government firmed up its borrowing calendar for the second half of FY20 in the last week of September. But given the criticism of the move by several experts (former RBI governor Raghuram Rajan has cautioned against its temptation and even PM-EAC member Rathin Roy has sought a white paper on the issue), the new economic affairs secretary will have to carefully reassess the plan. This will likely take some time. Even Swadeshi Jagaran Manch (SJM), an affiliate of the RSS, has vehemently opposed the idea of selling the bonds in foreign currency.

Amid growing opposition to the offshore paper issue, sovereign bonds fell on Thursday. The yield on the benchmark 10-year bonds inched up 12 basis points to 6.55%, before closing at 6.51%.Sources had earlier said the Centre was unlikely gain a windfall in one go but will still reap rich financial dividends, as the Jalan panel would recommend the transfer of the central bank’s excess reserves to the government over a period of three-five years. Garg had dissented, as he had reservations on the methodology endorsed by other members of the panel to arrive at the size of the RBI’s “surplus”, and also wanted the entire transfer in one go.

The latest FY20 Budget has pegged RBI’s dividend at Rs 90,000 crore, against Rs 68,000 crore last fiscal, even without factoring in the ECF review. So the surplus transfer could help the government tide over any potential shortfall in its tax revenue and contain fiscal deficit unless the panel ties the transfers to specific use like retiring public debt or recapitalisation of state-run banks.

A recent report by Bank of America Merrill Lynch said the Jalan committee could identify an excess buffer of up to Rs 3 lakh crore. As of June 30, 2018, the RBI’s contingency and asset development funds aggregated Rs 2,54,919 crore. These funds have been created by transfers from the central bank’s income account and are in the nature of provisions for contingencies.

The amounts held in CGRA stood at Rs 6,91,641 crore at the end of June 2018. As the head of the economic affairs department, Garg was leading the finance ministry’s tussle against the RBI, which was caused by the ministry’s demand that the central bank must relax rules for stressed state-run banks, facilitate more lending to MSMEs and also transfer its excess reserves. He had also taunted Viral Acharya, then RBI deputy governor, for publicly denouncing any government incursion into the central bank’s autonomous turf and warning any such actions could invite the “wrath of the markets”.

The ministry even invoked the never-used Section 7 of the RBI Act to seek mandatory consultations with the central bank on contentious issues. The rift finally culminated in the resignation of Urjit Patel as governor in December last year. Earlier this week, Acharya, too, quit months ahead of his term. Recently, another Budget proposal asking Sebi to transfer its excess capital was opposed by the stocks and commodity markets regulator, which said the move would hit its financial autonomy.

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