Not ask­ing RBI for ~3.6 tril­lion: Govt

DE A Sec ySubh ash Garg says dis­cus­sions are on over cap­i­tal frame­work

Business Standard - - FRONT PAGE - ARUP ROYCHOUDHURY New Delhi, 9 No­vem­ber

In what seemed to be a soft­en­ing of its stance by the gov­ern­ment in its tus­sle with the Re­serve Bank of In­dia (RBI), Eco­nomic Af­fairs Sec­re­tary Sub­hash Garg on Fri­day said there was no pro­posal by the Cen­tre to ask the cen­tral bank to trans­fer any spe­cific amount. The is­sue be­ing dis­cussed was for an ap­pro­pri­ate eco­nomic cap­i­tal frame­work.

Garg’s state­ment, on Twit­ter, comes af­ter ex­ten­sive re­ports in the me­dia of the lat­est face-off be­tween the fi­nance min­istry and the RBI over the for­mer re­fer­ring to Sec­tion 7 of the RBI Act in its com­mu­ni­ca­tion with the cen­tral bank last month.

“A lot of mis­in­formed spec­u­la­tion is go­ing around in me­dia. (The) Gov­ern­ment’s fis­cal math is com­pletely on track. There is no pro­posal to ask the RBI to trans­fer ~3.6 or 1 lakh crore (tril­lion), as spec­u­lated. Only pro­posal un­der dis­cus­sion is to fix ap­pro­pri­ate eco­nomic cap­i­tal frame­work of RBI,” Garg tweeted.

De­spite the tweet, how­ever, things are un­likely to change much. Sources in the gov­ern­ment said as part of dis­cus­sions on the eco­nomic cap­i­tal frame­work, the gov­ern­ment

did tell the RBI that ac­cord­ing to its cal­cu­la­tions the cen­tral bank could free up ~3.6 tril­lion if it changed its for­mula. The fi­nal de­ci­sion on how much to pay will lie with the RBI.

The gov­ern­ment will not com­pro­mise on seek­ing the RBI’s ex­cess cap­i­tal as part of a frame­work, but will be flex­i­ble on the amount to be paid and is will­ing to ne­go­ti­ate, top sources in the gov­ern­ment said.

“The gov­ern­ment’s fis­cal deficit in 2013-14 (FY14) was 5.1 per cent of gross do­mes­tic prod­uct (GDP). From 2014-15 (FY15) on­wards, the gov­ern­ment has suc­ceeded in bring­ing it down sub­stan­tially. We will end the 2018-19 (FY19) with a fis­cal deficit of 3.3 per cent of GDP. The gov­ern­ment has ac­tu­ally fore­gone ~700 bil­lion of bud­geted mar­ket bor­row­ing this year,” Garg tweeted.

“GOV­ERN­MENT'S FIS­CAL MATH IS COM­PLETELY ON TRACK. THERE IS NO PRO­POSAL TO ASK RBI TO TRANS­FER ~3.6 LAKH CRORE OR ~1 LAKH CRORE (TRIL­LION), AS SPEC­U­LATED” SUB­HASH CHAN­DRA GARG, ECO­NOMIC AF­FAIRS SEC­RE­TARY “WHAT IS THIS JARGON PUT OUT BY THE GOV­ERN­MENT ABOUT ‘FIX THE ECO­NOMIC CAP­I­TAL FRAME­WORK OF THE RBI?’ YOU FIX WHAT IS BROKE” P CHI­DAMBARAM, FOR­MER FI­NANCE MIN­IS­TER

LOCK­ING HORNS

The gov­ern­men­tand the RBI have been fac­ing off over a num­ber ofis­sues

JUN-AUG 2018:

A North Block in­ter­nal note says the RBI has been too con­ser­va­tive in its cal­cu­la­tions and should pay the Cen­tre ~3.6 trn

EARLY OCT:

FinMin writes to the RBI, seek­ing talks with guv un­der Sec­tion 7 of the RBI Act

OCT 23: OCT 26: OCT 27: OCT 31: NOV 2:

RBI board meets; no so­lu­tion reached

RBI Deputy Gover­nor Vi­ral Acharya takes on the gov­ern­ment and ad­vo­cates for cen­tral bank au­ton­omy

FM Arun Jait­ley re­sponds by say­ing gov­ern­ments are ac­count­able, and need more ac­cess to reg­u­la­tors

The gov­ern­ment’s let­ters cit­ing Sec­tion 7 re­vealed through news re­ports

Eco­nomic Af­fairs Sec­re­tary Sub­hash Chan­dra Garg hits out at Acharya via tweets

NOV 19:

Next board meet­ing of the RBI Of­fi­cials said the gov­ern­ment had been ask­ing for a new eco­nomic cap­i­tal frame­work for long. This will help de­cide the level of ex­cess cap­i­tal the RBI keeps with it­self to bat­tle sys­temic risks and the div­i­dend it pays the gov­ern­ment. The gov­ern­ment feels that the RBI is more con­ser­va­tive than other cen­tral banks when it comes to cal­cu­lat­ing cap­i­tal needs as well as the div­i­dend paid to the Cen­tre.

The RBI cal­cu­lates its cap­i­tal needs based on “stressed value-at-risk” val­u­a­tions at a 99.99 per cent con­fi­dence in­ter­val, while the gov­ern­ment wants the cen­tral bank to use just “value-at-risk” (VAR) at a 99 per cent con­fi­dence in­ter­val, which most other cen­tral banks use. In other words, the RBI is more risk-averse than the gov­ern­ment wants it to be.

Shift­ing to VAR at 99 per cent con­fi­dence in­ter­val will lead to a re­duc­tion in the amount the RBI pro­vi­sions, free­ing up more money to pay the Cen­tre, of­fi­cials said. The Cen­tre will keep push­ing the cen­tral bank to adopt a new model and a new div­i­dend pol­icy at the RBI’s next board meet­ing on No­vem­ber 19, as well as through other for­mal and in­for­mal channels of com­mu­ni­ca­tion.

“But, we are not say­ing pro­vi­sion it ac­cord­ing to what we want. Let the RBI de­cide how much it wants to pro­vi­sion. It has to be, how­ever, less con­ser­va­tive in its assess­ment,” a se­nior of­fi­cial said, adding that what­ever amount is de­cided upon, the RBI does not have to pay at once, but can spread it out over some years. Ac­cord­ing to ex­ist­ing norms, the RBI trans­fers a sur­plus from its bal­ance sheet to the Cen­tre ev­ery year as div­i­dend.

For its July 2016-June 2017 fis­cal year, it had trans­ferred ~306 bil­lion to the gov­ern­ment. For July 2017-June 2018, the RBI has said it will trans­fer ~500 bil­lion. The de­mand for ad­di­tional sur­plus by the gov­ern­ment has been a long stand­ing one.

In his 2016-17 Eco­nomic Sur­vey for­mer chief eco­nomic ad­vi­sor Arvind Subra­ma­nian had de­tailed the gov­ern­ment’s view. A chart in the sur­vey showed that only three na­tions — Nor­way, Rus­sia and Malaysia — had cen­tral banks with higher eq­uity as a per­cent­age of to­tal bal­ance sheet than In­dia.

“There is no par­tic­u­lar rea­son why this ex­tra cap­i­tal should be kept with the RBI. Even at cur­rent lev­els, the RBI is al­ready ex­cep­tion­ally highly cap­i­talised. In fact, it is one of the most cap­i­talised cen­tral banks in the world. So, it would seem to be more pro­duc­tive to re­de­ploy some of this cap­i­tal in other ways,” Subra­ma­nian had said in the Sur­vey.

“The key prin­ci­ple that should be ob­served in this process is that the ex­cess cap­i­tal in the RBI, in­clud­ing that cre­ated by de­mon­eti­sa­tion, is a bal­ance sheet or wealth gain and not an in­come gain. Hence, the uses to which this is put should be of a bal­ance sheet na­ture,” Subra­ma­nian had said, adding that any strat­egy to use the ex­cess cap­i­tal must be done within rel­e­vant laws and with the full co­op­er­a­tion of the RBI.

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