Former RBI deputy governor Viral Acharya has provided additional insights into the events that led to the public confrontation between the government and the Reserve Bank of India (RBI) in 2018, just a year before the 2019 Lok Sabha elections.
In an updated preface to his book, "Quest for Restoring Financial Stability," published in 2020, Acharya revealed that in 2018, the RBI rejected the government's proposal to withdraw Rs 2-3 lakh crore from its balance sheet for pre-election spending.
The revelations in the new preface, as reported by the Mint newspaper, align with calls for increased government spending leading up to the 2024 general and assembly elections. This comes as tax collections have seen minimal growth in the first five months of FY24.
For the first time, Viral Acharya openly disclosed the sequence of events that led to disagreements between the RBI and the government in 2018. It is worth noting that Acharya resigned from his position six months before his term was set to end in 2019, a year after Urjit Patel's resignation as RBI Governor.
In the preface, Acharya mentioned that creative minds in the "bureaucracy and the government" devised a plan to transfer substantial sums accumulated by the RBI during the previous governments' tenures to the current government's account.
Acharya explained that each year, the central bank allocates a portion of its earnings to reserves instead of disbursing them entirely to the government. He noted that in the three years leading up to demonetization, the central bank made record profit transfers to the government.
He further stated that during the year of demonetization, the expenses related to currency printing reduced the transfers to the Centre, which, according to him, intensified the government's demand for surplus fund transfers before the 2019 general elections.
Acharya referred to this as an attempt to achieve back-door monetization of the fiscal deficit by the central bank, adding that it raised the question of why populist expenditures would be reduced in an election year when the central bank's balance sheet could be utilized to cover surging fiscal deficits.
Viral Acharya also highlighted another reason for the government's pressure on the RBI, which was the government's inability to generate sufficient revenue from divestment. He pointed out that the government has often bridged this divestment gap by seeking transfers from the RBI.
When the RBI did not comply with the requested transfers, a proposal within the government suggested invoking Section 7 of the Reserve Bank of India Act. This section allows the government to issue directions to the bank, in consultation with the RBI governor, if it is deemed necessary in the public interest.
Acharya stressed the importance of open debates on matters of "public interest" rather than discussing them behind closed doors.
He explained that his lecture played a role in guiding prudent decision-making, even if it wasn't well-received by some in the government. Ultimately, the government sidelined most of the original proponents of the idea and established a committee chaired by former RBI governor Bimal Jalan.
This committee developed a "reasonable framework" for future transfers from the RBI's balance sheet. A significant example of such a transfer occurred during the pandemic in 2020, a move that Acharya considered well-justified.
In FY23, the central bank disbursed dividends amounting to Rs 87,416 crore to the government, a substantial increase from Rs 30,307 crore in FY22.
Acharya also provided further details on the improvement of bank balance sheets in 2023. This improvement resulted from the continued implementation of the asset quality review initiated by the Reserve Bank in 2015, aimed at identifying bad loans and implementing corrective measures.
