Amid a face-off with the RBI, the government on Friday said 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 a massive Rs 9.59 lakh crore 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 Rs 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 (Rs) 3.6 or (Rs) 1 lakh crore, as speculated,” he 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 (Rs) 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 Rs 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 Rs 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. 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 Rs 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”.
