Cash ban flop, polls push govt to RBI funds: Sources

The failure of Prime Minister Narendra Modi's demonetisation drive, now exactly two years old, along with the general elections round the corner, are the main reasons the government is eyeing the Reserve Bank’s capital reserves, senior RBI officials told DH on Wednesday, speaking on condition of anonymity.

According to the officials, the major point of contention between the RBI and the government is the latter's proposal to get its hands on Rs 3.6 lakh crore of the bank's reserves, an idea driven by the finance ministry's view that the surplus can be managed jointly by the government and the RBI.

The government wants to use the money to fund populist schemes in election season without causing the fiscal deficit to widen further, the officials said.

The country’s fiscal deficit -- the amount by which the government's spending exceeds its income -- in the first six months of the current financial year has already touched 95.3% of the budgeted estimate, increasing 4 percentage points from 91.3% in the corresponding period last year.

Overnight, demonetisation, announced on November 8, 2016, outlawed Rs 15.41 lakh crore of high-value currency notes, forcing people to exchange their old notes for new currency. The thinking was that people would hand in only two-thirds of this amount, and a third would be black money, which would ultimately be flushed out of the system. Instead, almost all the money -- Rs 15.31 lakh crore -- was deposited in banks, and the government, which had reckoned with a nice windfall as a by-product of demonetisation, was forced to pay back the entire sum to depositors in the form of new notes.

To make matters worse, of the Rs 10,720 crore difference between the notes outlawed and what the government had to pay out as new notes, a further Rs 7,965 crore was used to print the new notes.

"We got everything back. The entire exercise had failed,” said one of the sources, adding that the RBI was in no mood to relent on the issue of giving up its reserves.

“We need these reserves when we set up something new. It’s the profits that we have made and ploughed back. These reserves are meant for development not election promises. We used them in case of setting up entities like National Housing Bank,” said the source, a senior RBI official speaking on condition of anonymity.

For the financial year ended on June 2018, the RBI had total reserves of Rs 9.59 lakh crore, which comprised mainly currency and gold revaluation account (Rs 6.91 lakh crore) and contingency fund (Rs 2.32 lakh crore).

Read more:

Demonetisation at 2: Political fodder, changed aims

Note ban @ 2: Was the exercise worth taking?