In a startling revelation, former Reserve Bank of India (RBI) deputy governor Viral Acharya shed light on a contentious clash between the RBI and the government in 2018. The government had proposed extracting a staggering ₹2-3 trillion from the RBI’s balance sheet for pre-election expenditure preceding the Lok Sabha polls in the subsequent year. This disclosure, disclosed in the prelude to Acharya’s book titled “Quest for Restoring Financial Stability in India,” published by Penguin Random House India, comes at a time when there are increasing calls for elevated government spending before the impending general and assembly elections in 2024.
Acharya unveiled the series of events that precipitated the discord between the RBI and the government, a dispute he had hinted at in his speech during the A.D. Shroff Memorial Lecture back in late 2018. He divulged that “creative minds in the bureaucracy and the government” had devised a plan to transfer substantial sums accumulated by the RBI during the tenure of previous governments to the current government’s coffers. This revelation is part of the updated edition of his book, initially published in 2020.
Every year, the central bank retains a portion of its profit instead of allocating it entirely to the government. In the three years leading up to the demonetization episode, the RBI made record profit transfers to the government, as stated by Acharya. However, during the demonetization year, the expenses associated with currency printing diminished the transfers made to the government. Consequently, there was a heightened government demand in the lead-up to the 2019 elections. Acharya described this as an endeavor to effect a surreptitious monetization of the fiscal deficit by the central bank. He questioned why populist expenditures were being curtailed in an election year when the central bank’s balance sheet could be exploited to cover surging fiscal deficits.
Another factor exerting pressure on the RBI, according to Acharya, was the government’s inability to boost divestment revenues. The government’s yearly reliance on transfers from the RBI to make up for divestment shortfalls has now become a recurring practice.
When the RBI did not comply with the transfer requests, the government explored invoking Section 7 of the Reserve Bank of India Act, which empowers the government to issue directions to the bank, in consultation with the RBI governor, deemed necessary in the public interest. Acharya argued that matters of “public interest” like this should be subject to open debate rather than discussed behind closed doors, elucidating the RBI’s stance.
Acharya noted that his lecture contributed to sound counsel prevailing, despite displeasure within the government. The government ultimately sidelined most of the original proponents of the idea and established a committee chaired by former RBI governor Bimal Jalan. This committee formulated a “reasonable framework” for future transfers from the RBI’s balance sheet. One notable instance of such a transfer occurred during the pandemic in 2020, a move that Acharya deemed well-justified.
In fiscal year 2023, the central bank disbursed dividends of ₹87,416 crore to the government, a substantial increase from ₹30,307 crore in the previous fiscal year.
Furthermore, Acharya explained how bank balance sheets improved in 2023, owing to the asset quality review initiated by the Reserve Bank in 2015 to identify non-performing loans and implement corrective measures, a practice that has been steadfastly maintained.
This revelation sheds light on a critical episode in the intersection of finance and governance in India, emphasizing the need for transparency and informed discourse in matters of fiscal policy and central banking.
