In 2018, the RBI rejected a government transfer of 2-3 lakh crore

In 2018, the RBI rejected a government transfer of 2-3 lakh crore

A year before the 2019 Lok Sabha elections, former RBI deputy governor Viral Acharya provided more information regarding the circumstances that led to the public dispute between the government and the Reserve Bank of India in 2018.

A brief about in 2018, the RBI rejected a government transfer of 2-3 lakh crore 

He revealed that the Reserve Bank of India rejected the government’s demand to take out Rs 2-3 lakh crore from its balance sheet in 2018 for pre-election spending in an updated preface to his book, Quest for Restoring Financial Stability, which would be released in 2020.

The specifics of the new preamble, according to the Mint newspaper, correspond with calls for increased government spending before the general and assembly elections in 2024, despite the fact that tax collections have only slightly increased through the first five months of FY24.

Viral Acharya publicly disclosed the series of events that led to the differences between the RBI and the government in 2018 for the first time. It should be remembered that Acharya left his position in 2019, a year after Urjit Patel left his position as RBI Governor, six months before his term was over.

In the preface, he claimed that the “bureaucracy and the government” came up with a clever method to transfer large sums amassed by the RBI throughout the tenure of past governments to the account of the current government.

According to Acharya, the central bank assigns a percentage of its annual profits to reserves rather than giving them completely to the government. He pointed out that the central bank transferred unprecedented amounts of profit to the government in the three years before demonetization.

According to him, this resulted in the government “intensifying” its demand for excess fund transfers prior to the 2019 general elections. He continued by stating that during the demonetization year, the cost of currency printing caused a decline in the transfers to the Center.

Why limit populist spending in an election year when the central bank balance sheet can be looted and soaring fiscal deficits essentially monetized? Acharya characterized this as an effort to assure back-door monetization of fiscal deficit by the central bank.

Another justification for putting pressure on the RBI was brought up by Viral Acharya: the government’s inability to raise enough money via divestments. He stated that it has become a yearly ritual to close this divestment gap with transfers from the RBI.

A proposal within the government suggested invoking Section 7 of the Reserve Bank of India Act when the RBI refused to make the desired transactions. If it is deemed necessary in the interest of the public, the government may use this clause to command the bank after consulting with the RBI governor.

Acharya also underlined the value of discussing issues of “public interest” in the open rather than privately.

Even if his talk wasn’t warmly welcomed by everyone in the government, he noted that it helped to promote wise decision-making. The majority of the idea’s original proponents were eventually marginalized by the government, which then appointed Bimal Jalan, a former RBI governor, to lead a group.

For upcoming transfers from the balance sheet of the RBI, this committee developed a “reasonable framework”. One notable case of such a shift took place in 2020 during the pandemic, a decision Acharya said was well-justified.

The central bank paid the government dividends totaling Rs 87,416 crore in FY23, a significant rise from Rs 30,307 crore in FY22.

Acharya also went into detail about how bank balance sheets improved in 2023. This improvement resulted from the ongoing application of the Reserve Bank’s 2015-initiated asset quality assessment, which sought to identify subprime loans and put remedial measures in place.

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