As the spotlight is on the central bank’s Nov 19 board meet, DEA secretary says its capital framework is under review.
While all eyes are on the Reserve Bank of India’s November 19 board meeting where its top management and the government nominees are poised to pit against each other on a host of contentious issues, economic affairs secretary Subhash Chandra Garg said on Friday the government was not seeking Rs 3.6 lakh crore from the central bank to meet its fiscal requirements. However, he admitted that a proposal was under discussion to fix “an appropriate economic capital framework of RBI”.
“Lot of misinformed speculation is going around in media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer Rs 3.6 or 1 lakh crore, as speculated,” Garg tweeted.
A demand from the finance ministry for the transfer of a large amount as surplus from the RBI is believed to be one of the key areas of discord between the government and RBI. The two also have different views on many other issues, including, principally, the finance ministry’s use of the never-before-used, powerful Section 7 to open talks with the RBI and a proposal to ease the “stringent” prompt corrective action framework (PCA) for weak public sector banks to enable them to lend more freely at a time when NBFCs are facing a liquidity crisis.
While the RBI has recently acceded to some of the demands from the government — it allowed more bank lending to NBFCs and relaxed the terms for Indian firms to raise overseas debt — the intractable ones are the issues of capital transfer and the PCA framework.
While Garg even on Friday exuded confidence about the government’s fiscal maths and reiterated that it would stick to the fiscal deficit target of 3.3% of the GDP for the current financial year, many analysts believe that given that many revenue areas are not performing as per expectations, the government may have to cut expenditure to meet the fiscal target. Also, since demonetisation hasn’t yielded any windfall for the RBI and hence the government, these quarters feel that the election-bound government would be more than happy if the RBI breaks convention to transfer a higher amount to the government, apart from the realised profits it usually transfers.
However, an aggressive stand by the government has put it in a weak wicket. In recent lecture in Mumbai, RBI deputy governor Viral Acharya had not only stoutly defended the government’s move but also lent credence to news reports suggesting a specific amount demanded by the ministry. He referred to an item headlined “Govt pegs RBI excess capital at 3.6 trln rupees, seeks it as surplus” by the news agency Cogencis. Acharya quoted from recent pieces on the subject by former deputy governor Rakesh Mohan where the latter highlights why a central bank needed a strong balance-sheet to perform its full range of critical functions for the economy. “The longer-term fiscal consequences would be the same if the government issued new securities today to fund the expenditure. Raiding the RBI’s capital creates no new government revenue on a net basis over time, and only provides an illusion of free money in the short term,” Mohan had written.
Acharya also sought to dispel the notion that fears of central bank losses are illusory. “According to the Bank for International Settlements (BIS), 43 out of 108 central banks reported losses for at least one year between 1984 and 2005.”
In recent interviews to TV channels in India, former RBI governor Raghuram Rajan also said RBI ought not to pay more than its realised profits to the government. A well-capitalised RBI, he said, would be of much help on a rainy day.
As per the annual accounts of RBI as on June 30, 2018, contingency and asset development fund aggregated Rs 2,54,919 crore. These funds have been created by transfer from the income account and are in the nature of provisions for contingencies. As percentage to total assets it amounts to a below 7%. The perception that the RBI capital is in excess of what generally other central banks have is because of the amounts held in CGRA, which amounts to Rs 6,91,641 crore.