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Friday 5 June 2020

RBI surplus transfer to govt: A second-level game

It wasn't Shaktikanta Das taking the position once held by Raghuram Rajan and Urjit Patel that did all the trick; the battle of wits played out a notch lower in the hierarchy



New Delhi: It is tempting to assume that the transfer of surplus in the reserves of the RBI to the government was made possible by a government-friendly Shaktikanta Das taking the position once held by Raghuram Rajan and Urjit Patel. But the real game was played a notch lower in the hierarchy of the country’s economic establishment.

Members of the Bimal Jalan Committee, under whose pressure it was difficult for the RBI to transfer even Rs 66,000 crore (including Rs 8,000 crore of “surplus reserves”) to the government, had built an impregnable fortress of sorts in the face of a persistent Subhash Chandra Garg, the former finance secretary who was also a nominee on the panel, who insisted the government needed a much larger amount.

In the meantime, the government had budgeted for Rs 90,000 crore in the current fiscal, its strained finances notwithstanding, and the amount the RBI was ready to spare was nowhere near that.

When Garg left, his successor Rajiv Kumar, helped by Atanu Chakraborty in the department of economic affairs (DEA), displayed superior negotiating skills to make the RBI central board give away a record dividend. Better still, they transferred excess provisions of Rs 52,637 crore on Monday. The sum occupying the headlines of newspapers today, Rs 1.76 lakh crore, is a sum of the two amounts: dividend and excess provisions. This is 2.7 times the original estimate. To a welfarist and Keynesian government that Prime Minister Narendra Modi leads, this is a windfall gain.

As the senior-most babu in all the five departments of the finance ministry, Garg had been occupying the positions of both Kumar and Chakraborty earlier, making the RBI-government bargain difficult.

With Garg’s departure, the RBI-DEA mutual bitterness was gone. The strife that had led to the ouster of Urjit Patel was over three demands of the government:

  1. MSMEs must be subjected to easier rules
  2. Norms for stressed banks must be relaxed
  3. Implementation of the capital buffer for banks, which was pressuring them, must be postponed

Gradually, the RBI came around to accepting the government position. The climax happened yesterday.

The RBI central board meeting on 26 August was eventful. Tata Sons chairman N Chandrasekaran, TeamLease chairman Manish Sabharwal, RIS chief Sachin Chaturvedi and other directors questioned the range of transfer that the Jalan Committee had recommended. There were also sceptics on the board who found it unbelievable that the central bank and the Union government could sort out the issues between them in a short span of eight months. Deputy governor NS Vishwanathan responded to the queries.

Kumar, Chakraborty and others that the government had placed in its new team now persuaded the RBI to spare at least such an amount that would cover all risks in the scenario of a global slowdown or recession, coupled with fluctuating forex and money markets. The new team made the committee agree to cover 99.5% of RBI’s market risk. This was a substantial 0.5% higher than what the central banks of other countries accept.

A 5.5%-6.5% of the RBI’s balance sheet size was agreed upon as a contingent risk buffer to cover instability, if any, in the finance and money markets.

RBI’s excess provisioning ranged between the highest of Rs 11,608 crore and the lowest of Rs 52,637 crore on the basis of the current balance sheet. The board settled for the latter.

Then came the question of fixing the amount to be transferred to the government. The board agreed to give the government the entire net income of Rs 1.23 lakh crore of the RBI for 2018-19. While the opposition is complaining, this was no mean feat to pull off.

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