The more things change…

The current tussle between the RBI and the government over the former’s reserves is not the first one. There was a similar tussle 32 years ago in 1986.

The newly appointed finance secretary, S Venkitaramanan, looked around and found that the government was desperately short of money. He then identified two possible sources for augmenting government revenue.

One was the traditional one of imposing a higher statutory liquidity ratio (SLR), which would make the RBI give the government cheap loans. The other was the RBI’s profits, called surplus.

R N Malhotra was governor of the RBI then. He had been finance secretary from 1982 to 1985. When he received Mr Venkitaramanan’s proposal, he wrote a long note saying no to both.

Malhotra’s argument against a higher SLR was that it would leave less for the banks to lend to medium and large industry, which had large investment plans and working capital needs. This, he said, was not a good idea.

As to transferring RBI profits, he wrote they were “different” from the normal profits of other public sector companies. Anyway, he said, they were notional. He added even if he transferred the profits, it would be identical to increasing RBI credit to government. He went on to say that higher transfers should not be considered “as an avenue for augmenting resources”.

To top off this tutorial Malhotra decided to brief the prime minister directly. But for some reason Rajiv Gandhi called off the meeting at the last minute.

This forced Malhotra to say it all to the finance minister and the deputy chairman of the Planning Commission. Mr Venkitaramanan was most annoyed but could do nothing and the issue was shelved.

Trouble for Rajiv

The last word had not, however, been heard. As the fiscal situation worsened in 1988, Mr Venkitaramanan raked it up again.

Thanks to massive drought, 1987 had been a disastrous year for the economy. Large-scale imports of sugar and edible oils, which had a large weight in the food basket, had to be made. These imports had been financed by short-term borrowing, which had begun to shoot up sharply.

It had also been a very bad year politically for Rajiv. His original team had come apart completely. Arun Nehru, Arun Singh and V P Singh, three of his closest political allies, had gone out of the government.

The Bofors scandal had broken and Rajiv was personally accused of taking bribes. A couple of state elections had also been lost. At one point early in the year, he had even had a short, highly unsettling battle with President Zail Singh, who let it known that he could remove him.

In short, Rajiv was in serious trouble, both politically and with the economy. It was in this atmosphere that Mr Venkitaramanan was tasked with finding more money.

Gimme, gimme, gimme

The government’s grouse was that profits being transferred annually had remained at ~2.10 billion ever since the start. It saw no reason why the RBI, which was owned by the government, should hold on to its profits, which, it said, anyway were generated because of the sovereign function of seigniorage. In fact, Mr Venkitaramanan went so far as to tell the RBI that he wanted half the profits.

Malhotra again refused. The RBI just could not afford it, he said, because its agency costs had gone up and its income had gone down. He added some other reasons as well.

As to a fixed percentage transfer of gross profits, he was adamant. It is a terrible idea, he said, because it would seriously reduce the allocations to the statutory funds.

But Mr Venkitaramanan was nothing if not clever. He borrowed from NRIs and transferred the liability to the RBI. The result was the same as if what he had suggested in the first place had been done. The government got the money and the RBI shouldered the burden.

Three officers who were in the finance ministry would go on to become successive governors of the RBI. One was Bimal Jalan as chief economic adviser; another was Y V Reddy, joint secretary; and the third was a director, Duvvuri Subbarao.

In December 1990, Mr Venkitaramanan became RBI governor. One of the first things he did was to reverse Mr Malhotra’s stand.

The RBI transferred ~3.50 billion to the government immediately. Since then the transfers have been increasing, touching a high of ~630 billion in 2015.

And so the show goes on.