Not seek­ing trans­fer of big cut from RBI re­serve: Govt

Hindustan Times (Ranchi) - - Front Page - Press Trust of In­dia let­ters@hin­dus­tan­times.com ■

NEWDELHI: Amid a per­ceived face­off with the RBI, the govern­ment said on Fri­day that it is dis­cussing an “ap­pro­pri­ate” size of cap­i­tal re­serves that the cen­tral bank must main­tain but de­nied seek­ing a mas­sive cap­i­tal trans­fer from the Re­serve Bank.

The Re­serve Bank of In­dia (RBI) has ₹9.59 lakh crore of re­serves, and the govern­ment, if re­ports are to be be­lieved, wants the cen­tral bank to part with a third of that fund -- an is­sue which along with eas­ing of norms for weak banks and rais­ing liq­uid­ity has brought the two at log­ger­heads in re­cent weeks.

Eco­nomic af­fairs sec­re­tary Sub­hash Chan­dra Garg took to the twit­ter to clar­ify that the govern­ment wasn’t in any dire needs of funds and that there was no pro­posal to ask the RBI to trans­fer ₹3.6 lakh crore.

The govern­ment, he said, is on track to meet the fis­cal deficit tar­get of 3.1% for the fi­nan­cial year 2018-19.

“There is no pro­posal to ask RBI to trans­fer (₹) 3.6 or (₹) 1 lakh crore, as spec­u­lated,” Garg tweeted. “Govern­ment’s FD (fis­cal deficit) in FY 2013-14 was 5.1%. From 2014-15 on­wards, Govern­ment has succeeded in bring­ing it down sub­stan­tially. We will end the FY 2018-19 with FD of 3.3%. Govern­ment has ac­tu­ally fore­gone (₹) 70,000 crore of bud­geted mar­ket bor­row­ing this year.”

Garg said the only pro­posal “un­der dis­cus­sion is to fix ap­pro­pri­ate eco­nomic cap­i­tal frame­work of RBI”.

Eco­nomic cap­i­tal frame­work refers to the risk cap­i­tal re­quired by the cen­tral bank while tak­ing into ac­count dif­fer­ent risks.

For­mer chief eco­nomic ad­viser Arvind Subra­ma­nian had in Eco­nomic Sur­vey 2016-17 said the RBI was al­ready ex­cep­tion­ally highly cap­i­talised and nearly Rs 4 lakh crore of its cap­i­tal trans­fer to the govern­ment can be used for re­cap­i­tal­is­ing the banks and/or re­cap­i­tal­is­ing a Pub­lic Sec­tor As­set Re­ha­bil­i­ta­tion Agency.

How­ever, this pro­posal never saw the light of the day.

On Thurs­day, for­mer fi­nance min­is­ter P Chi­dambaram had al­leged that the Naren­dra Modi govern­ment was try­ing to cap­ture the RBI to tide over its fis­cal cri­sis. “The govern­ment stares at a fis­cal deficit cri­sis. The govern­ment wants to step up the ex­pen­di­ture in an elec­tion year. Find­ing all av­enues closed, in des­per­a­tion, the govern­ment has de­manded ₹1 lakh crore from the re­serves of RBI,” he had stated.

If RBI Gov­er­nor Ur­jit Pa­tel stands his ground, the Cen­tre is plan­ning to is­sue a di­rec­tion un­der Sec­tion 7 of the RBI Act, 1934, di­rect­ing the apex bank to trans­fer ₹1 lakh crore to the govern­ment’s ac­count, he had claimed.

Sec­tion 7 of the RBI Act gives spe­cial pow­ers to the govern­ment to is­sue di­rec­tions to the RBI gov­er­nor on is­sues of pub­lic in­ter­est. It has never been used.

The govern­ment is seek­ing a trans­par­ent for­mula for ar­riv­ing at a min­i­mum thresh­old cap­i­tal re­serve needed to be main­tained in line with glob­ally ac­cept­able prac­tice, an of­fi­cial claimed.

“Cur­rently, the RBI’s cap­i­tal needs put its pro­vi­sion­ing at 27%, while most cen­tral banks have theirs at 14%. Our cal­cu­la­tions state that if RBI pro­vi­sions at 14%, it can free up to ₹3.6 lakh crore,” the of­fi­cial said adding that the money can be used for pub­lic wel­fare in­stead of ly­ing idle with RBI.

The is­sue may come up at the next RBI board meet­ing on Novem­ber 19.

The RBI and the govern­ment have not been on the same page on dif­fer­ent is­sues for some weeks now. The dis­agree­ments came out in open when RBI deputy gov­er­nor Vi­ral Acharya, in a hard-hit­ting speech, on Oc­to­ber 26 said that fail­ure to de­fend the cen­tral bank’s in­de­pen­dence would “in­cur the wrath of the fi­nan­cial mar­kets”.

“Hav­ing ad­e­quate re­serves to bear any losses that arise from cen­tral bank op­er­a­tions and hav­ing ap­pro­pri­ate rules to al­lo­cate prof­its in­clud­ing rules that gov­ern the ac­cu­mu­la­tion of cap­i­tal and re­serves is con­sid­ered an im­por­tant part of cen­tral bank’s in­de­pen­dence from the govern­ment,” he had said.

It later emerged that the govern­ment had in­voked a never-be­fore-used pro­vi­sion of the law -Sec­tion 7 of the RBI Act -- to seek from RBI dis­cus­sions on eas­ing NPA norms so that banks can kick start lend­ing and sup­port growth, and trans­fer more div­i­dend to boost liq­uid­ity.

The RBI, some say, may be open to eas­ing liq­uid­ity rules, in­clud­ing by in­ject­ing cash through open mar­ket pur­chases of bonds but an agree­ment on giv­ing away a part of its re­serves may not be easy to come by.

Ear­lier this year, the RBI de­cided to pay ₹50,000 crore as div­i­dend to the govern­ment in line with the Union Bud­get pro­vi­sions, help­ing the Cen­tre to stick to its fis­cal road map.

The Re­serve Bank, which fol­lows July-June fi­nan­cial year, has paid about 63% higher div­i­dend than the pre­vi­ous year (2016-17). The RBI made a div­i­dend pay­out of ₹30,659 crore for the fis­cal ended June 2017 which, it is to be noted, was less than half of the ₹65,876 crore it paid in the pre­vi­ous year.

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