Modi govt trying to capture RBI could be catastrophic: Chidambaram

Marco Green
November 9, 2018

RBI and the central government are now involved in a standoff and according to various reports, a major bone of contention between the two is that the government wants the central bank to part with a third of its Rs 9.6 lakh crore reserves. Economic Affairs Secretary Subhash Garg publicly asked RBI for an additional Rs 130 billion from its contingency reserves to take the total surplus received for the year to Rs 430 billion. Garg said there was "misinformed speculation" in the media, and that the government's fiscal math was "completely on track".

Dismissing talk of fiscal deficit crisis, Garg said, "Government's FD in FY 2013-14 was 5.1%". "From 2014-'15 onwards, government has succeeded in bringing it down substantially", he added. "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", he said.

Arvind Subramanian, former chief economic adviser to the government, had argued in his Economic Surveys that the central bank was sitting on too much capital and "assuming that the RBI returns four trillion rupees of capital to the government" it could be put to productive use. In fact, it is one of the most highly capitalized central banks in the world.

The government also wants the RBI to be lenient with capital adequacy norms, the official said, adding those norms for lenders are very stringent compared with global standards.

Yesterday, former finance minister P Chidambaram said the spat between the government and the RBI was over a huge sum of money the government has demanded from the central bank. "The government stares at a fiscal deficit crisis".

The government wants some of these strictures to be eased so that banks can kick start lending and support economic growth ahead of a general election early next year.

The government's demand is expected to further escalate tensions with the RBI which has lately intensified its push for its independence and autonomy.

The imposition of a never-before used rule was meant to force the hand of RBI Governor Urjit Patel, to pay Rs 1 lakh crore from the reserves of the Reserve Bank of India, who has refused to pay, he said.

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.

The RBI board is likely to discuss capital framework and other issues at its meeting scheduled for November 19.

Other reports by Click Lancashire

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