By looting the reserves of the Central Bank, the Government cannot build the fiscal flyover on deficit valley.            

A short time ago the fiery ‘Maha Sangram’ between the two bodyguards of ‘Hindusthan’, the Apex bank and “Sab ka Saath Sab ka Vikas” government over issues of public sector bank regulation, resolution of distressed assets and the central bank’s reserves had touched a high-point. Both allowed many issues to become chronic instead of thrashing over a cup of tea. Nevertheless the saas-bahu tussle between the bank and the government dates back to the first governor, Osborne Smith, and continues till date.

Now transfer of reserves of the Apex bank is not an argumentative issue since the appointment of Shaktikanta Das as the Governor of the Reserve Bank of India. Surely he seems to be all season friend of the government and decided to transfer Rs.28,000 crores to the Central government as interim dividend. The gross surplus received by the government for 2018-19 is significantly greater than Rs.50,000 crore including Rs.10,000 crore of interim dividend it got in 2017-18. What a mega support to the government which is inefficient to meet the fiscal deficit target !!!

Is new Avataar of RBI for harmony?

Of late the government which had budgeted Rs.54,817 crore as ‘Dividend/Surplus of Reserve Bank of India, Nationalized Banks and Financial Institutions’, has revised the estimation to Rs.74,140 crore. Although the government will enjoy favors having ‘an insider’ as RBI Governor and the Apex bank alone will bear a major chunk of government’s fiscal imprudence, one should seriously think whether this new role of RBI will be a game changer? In this regard some points are worth noting.

• Though every shareholder interested in dividend payout, it is unwise to consider the Central bank as corporate entity and the government should not compare itself with a company shareholder. Income and surplus growth of RBI cannot be calculated in commercial terms.
• This is the second successive year the government has received an interim dividend from the Central bank. As per the provisions of Section 47 of the RBI Act 1934 the surplus profit should be transferred to the government ‘only after making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds (and for all other matters)’ and very surprisingly the Act is silent on when the payment should be made. This loophole has to be plugged.
• The existing practice so far has been to transfer profits after the end of RBI’s financial year which follows July-June financial year. These profits are usually transferred after the August board meeting when the central bank presents its statutory annual report to the government.  Sudden transfer of huge money in an election year definitely surprises different stakeholders and it also raises their worries about the fiscal health of the government.
• The timing of dividend payout is extremely important, as it was the issue of interim dividend in Turkey, which disturbed the markets. The practice of an interim payout started under Mr. Urjit Patel, should not be perceived as the ‘birth right’ and the Apex bank should not be pressurized for transferring higher sum every now and then.

Both can enjoy the cocktail

Chronic incompetence of the government to curb overspending on various fruitless projects is a matter of concern. Many finance ministers are to conceal this veracity. The government has also failed repetitively to attain its original fiscal deficit aim. Now, Dil maange from RBI. By looting the reserves of the central bank, the government cannot build the fiscal flyover on deficit valley.

The present finance minister should take economically prudent decisions such as avoiding of farm loan waiver, mega-high minimum support prices (MSP) and many goodies to maintain the safety of vote bank even though these are politically tough calls. He should not forget the virtual fact that Argentina crunch was only due to pointless interference of the government and senseless effort to raid the reserves of the central bank. A constitutionally chosen government can command the accountability of any association or institute, but it should not cross ‘Lakshman Rekha’ to obtain desired outcome.

The government should not make RBI as scapegoat for its inefficiency to take advantage of low oil prices, fix the power sector dilemma, stabilize the rupee etc. The government should be receptive and quick enough to apprehend the suggestions from financial sector champions.

Hopefully, the committee under former RBI Governor Bimal Jalan which is now reviewing the economic capital framework for the RBI will craft robust system and structure. It was constituted to de-personalize and institutionalize a system for the sharing of the RBI’s surpluses with the government.

Mark it government is a political entity. It needs expert advice relating to maintenance of macroeconomic stability, financial stability and robust growth. The Apex bank is the appropriate entity to counsel the government in this esteem. As a regulator, the RBI performs numerous critical functions such as being banker to the government, monopoly issuer of legal tender currency, the custodian of payment systems etc. The government should not expect that RBI to dance to its tunes. The government should listen to the RBI like an ideal husband who respects his adorable wife’s words.

BY SHIVANAND PANDIT