On Thursday, near-identical reports in this newspaper and its sister publication, The Times of India, quoted unnamed sources (presumably at North Block, New Delhi, home of the finance ministry) revealing a few recommendations of a committee headed by former Reserve Bank of India (RBI) Bimal Jalan.
This panel was created by the RBI and has to calculate how much of the central bank’s Rs 9.8 lakh crore surplus, about 28% of gross assets, is actually needed as safety belt and ammunition against financial attack. The remainder, as demanded by the Narendra Modi regime, should be handed over to the exchequer.
This windfall can be used by New Delhi to recapitalise India’s fragile banks, or, because money is fungible, blown up on useless spending to meet the debt incurred by a bloated government machinery dogged by graft, sloth and ineptitude. The former, bank strengthening is a worthy investment. The latter, a shameful waste of public money. Unfortunately, there is no way to predict which way things will go, till it’s too late.
This is the principal reason why two previous RBI governors, Urjit Patel and Raghuram Rajan, were opposed to the idea of handing over central bank reserves to government. Now that both are gone, and a former bureaucrat is at the helm of RBI it’s expected that New Delhi will have its way with RBI surpluses.
This is where the Jalan panel’s recommendation, that the funds transfer be phased out over three to five years, comes in. It suggests a cautious, gradualist approach, familiar to conservative banks and investors and largely alien to New Delhi’s buccaneering approach to finance, where politicians are happy to splurge your money to boost their vote-share.
New Delhi says, globally central banks keep only about 14%, half what the RBI now holds and so the Old Lady of Mint Street can afford to relax her grip on purse strings. The global comparison is biased downwards: the US needs to hold next to no surplus reserves, because the dollar is the world’s reserve currency, making it immune from attack.
We don’t know yet exactly how much of the RBI’s funds ought to be freed up for sarkari consumption, according to the Jalan panel. But its gradualism is welcome.
The world economy is on a knife edge, thanks to the US-China trade war, which may escalate into a currency contest. Renewed sanctions on Iran have made oil markets volatile and India’s stagnant real and financial sectors show little sign of life. The RBI should have enough ammunition at hand to backstop any crisis in banks or raids on the rupee.
Not satisfied with extracting funds from the RBI, the government has made a similar demand from market regulator Sebi. New Delhi wants it to shift 25% of its surplus – at Rs 3,100 crore, peanuts compared to the RBI – into the Consolidated Fund of India (CFI). It also wants Sebi to seek government permission before making new investments or capital spending.
Sebi refuses to accede. One, it says if implemented, its autonomy as a statutory watchdog will be eroded. Two, it argues that once surpluses from Sebi’s earnings – from charging market participants for its services – becomes a part of the CFI, these fees and charges will be tantamount to a tax.
This will give New Delhi a perverse incentive to hike charges, increasing transaction costs for all players, denting market sentiment and herding investors towards the exit gate.
Netas and mandarins in New Delhi are desperate for any source of funds to Band Aid its growing debt and deficits. The way to do that is by smart fiscal management, controlling costs and running an efficient government. This has eluded New Delhi for the last five-plus years. So, New Delhi would rather pick Mumbai’s pocket than reform itself.