WEEKEND LIGHTER: RBI Pension Scheme
WEEKEND LIGHTER: RBI Pension Scheme
(September 24/25, 2016, No. 40/2016)
Weekend Lighter is
posted every Saturday @mgwarrier.blogspot.in
Under Leisure, I have included
excerpts from RBI Governor Rajan’s September 3, 2016 speech in Delhi.
I
Special editorial
RBI Pension Scheme*
Copied below is my
letter published in Business Standard, November 24, 2012:
“Make RBI whim-free: This refers
to the report “New bank licences 8-9 months after enabling legislation”
(November 17). If the finance ministry is confident that an amendment in the
Banking Regulation Act is not necessary to give the powers sought by the
Reserve Bank of India (RBI) for approving new banks, why is it not trying to
convince the apex bank first? The finance minister’s statement that the
ministry has “written” to RBI to start receiving applications is absurd. How
can any genuine promoter apply without knowing the regulatory environment in
which the new bank will function?
In October, RBI Governor D Subbarao had
suggested that the powers to RBI should come through a legislative amendment.
The powers given outside the provisions of the Act could contain stings, and could
also be taken back in a different situation through the same process.
Statutory bodies should not be made
subservient to the whims of ministry officials. RBI has faced problems on
issues relating to banks earlier, owing to blurred clarity in powers and
interpretation of law. Even today, a ten-year-old pension updation issue is
shuttling between RBI and the finance ministry.
M G Warrier Mumbai”
A pension scheme in
lieu of the then existing Contributory Provident Fund Scheme was introduced for
RBI employees who were in service as on January 1, 1986. The RBI Pension
Regulations, 1990 enabled periodic revision of pension and the possibility of
such revision when wages of serving employees were revised from time to time
was reiterated in an internal circular issued by RBI to lure more employees to
opt for the pension scheme. The RBI Pension Scheme, unlike the government
schemes which go by a “Pay As You Go” principle (meaning payment of pension
will be dependent on current revenues), is fully funded out of receivables
surrendered by pension optees and surpluses generated by discontinuance of CPF
in RBI (RBI augments the fund out of its income based on actuarial valuations).
RBI is convinced about
the need for periodical revision and, backed by RBI’s own Central Board decision,
has been ‘engaged’ with GOI (Refer relevant observations in RBI Annual Reports
2014-15 and 2015-16) in recent years. As of now, RBI calculates pension with
reference to 4 pay scales (1997, 2002, 2007 and 2012). The indecision
perpetuated for decades within an institution which is responsible for
monitoring the economy on an hourly basis and mandated to regulate and
supervise the financial system, can become a matter of ridicule, once the
gravity is understood by outsiders.
M G Warrier
*Disclaimer:
M G Warrier opted for VRS from RBI as General Manager in 2003 and is RBI
pensioner
Opening Remarks
1
RBI’s independence
This refers to the
well-researched article on RBI’s independence by Dr Charan Singh (The Hindu,
‘An independent RBI is a chimera’, September 21) which presumes there has been
a clamour for autonomy or independence of the Reserve bank of India(RBI) by successive
RBI governors. Once they took positions,
it has to be said to the credit of all RBI Governors who were in charge during
the last 25 years (Dr Y V Reddy to Dr Raghuram Rajan), that all of them
understood the evolution of RBI’s role in India’s economic development and the
contours within which the Indian central bank can function to achieve its
monetary policy objectives.
Inside RBI, all through,
the debate has been about ‘functional autonomy’ to formulate and implement
monetary policy and play the role assigned to the bank in regulating and
supervising the institutional system in the financial sector. The institution has
been taking in its stride ( and has not yet responded in public), the teasing
by North Block by trying to boss over it by interference even in the
implementation of a pension scheme which is fully funded from employees’
contribution and part-financed by RBI out of funds rendered surplus on
discontinuance of Contributory Provident Fund.
Occasionally, friction between North block and
Mint Road did surface when the former came out with ‘policy prescriptions’
through media without any consultation with Mint Road. The elegance with which
RBI handled such situations is part of history.
Dr Y V Reddy, Deputy
Governor, RBI (who subsequently became Governor) concluded the Second
Foundation Day Lecture at IIM, Indore on October 3, 2001, for which he chose
‘Independence of Central banks’ as subject, with the following prophetic
observation:
“In the years to come,
the sheer need to improve efficiency of operations will thrust upon the RBI a
greater degree of autonomy and, therefore, a greater degree of accountability.
In such a milieu, it is essential that the setting of goals and the policy
processes will need to evolve in a transparent manner. For the central bank,
these will be difficult times but also exhilarating times.”
The prophecy has come
true. Dr Raghuram Rajan, in his last public address of his three year tenure as
RBI Governor, speaking at St Stephen’s College, New Delhi on September 3, 2016
had this to say:
“When the
responsibilities of the RBI are fuzzy, its actions can continuously be
questioned. Instead, if the constitutional authorities outline a framework for
the responsibilities of the RBI, it can take actions consistent with those responsibilities
and be held (responsible) to outcomes. The inflation objectives recently set
for RBI by the Government are an example of what is needed. Critics can lambast
the RBI if it fails continuously to meet the objectives, but if they want it to
lower interest rates even when the RBI barely meets its objectives, they should
instead petition the Government to change the objectives.”
Quoted the above to make
the point that there is clarity of policy perspectives within RBI and this
institutional clarity has been understood by successive governors who have been
responsible for RBI’s monetary policy stance.
M
G Warrier, Mumbai
2
Leaving
policy to experts*
This refers to the report
“Centre appoints 3 scholars to RBI monetary policy panel” (HBL, September 23).
This formalises and professionalises the existing Technical Advisory Committee
(TAC) which has been advising RBI Governor on crucial issues concerning monetary
policy. To the extent that TAC’s advice was made known to the public, RBI has
been trying to be transparent even where Governor differed from the TAC’s
perceptions. The present arrangement
unburdens RBI Governor from individual responsibility in decisions on monetary
policy and makes the MPC comprising experts more relevant.
The criticisms like, the
possibility of MPC splitting into Team A (GOI nominees) and Team B (RBI
representatives including Governor) and pressurising Governor to use the casting
vote and the MPC’s suffering from imbalance of expertise as majority members
happen to be professional economists should now fade out. While all the three GOI nominees are renowned
economists, Governor, a Deputy Governor and an Executive Director from within
RBI (one a career central banker and another a career economist, both with
decades of relevant experience) will be able to provide inputs on needs
and expectations of banking sector and the economy in general.
In sum, the constitution
of MPC sends out a clear signal that GOI is serious about retaining RBI’s
status as an expert professional body.
M
G Warrier, Mumbai
*An edited (abridged)
version of this response appears under Letters, The Hindu Business Line, September 24, 2016
II
Recent responses
1
Welcome
refinements*
This refers to the report
“It’s the end of the line for Rail Budget” (The Hindu Business Line, September
22). It is comforting to see that Modi Government is able to think beyond
economic reforms (which, any government will have to do under compulsion in the
present scenario) and spare time for considering refinements in processes and
procedures affecting governance which did not get the attention they deserved
in the past. The reforms in the planning process, not stopping with just a
change in name to NITI Aayog, the work in progress in regard to revamp in
procedures of top level appointments, the debate on synchronising period of
conduct of election to all levels and the change in approach to Budget Exercise
now announced are all indicative of a mind-set inherited from the
pre-independence legacy.
The allegation that
merger of Rail Budget with the Union Budget is motivated by the possibility of
grabbing Railways’ assets and reduced
allocations for Railways and the suggestion that, now Railway ministry will be
jobless come from those who maintained status quo and were afraid of change. It
is true that the responsibility of the finance ministry increases and initially
the union budget will have to be sufficiently transparent to prove that the
Railways are better off, post-merger of budgets.
Now that planning has
been made a long term exercise, the annual budget exercises both at the Centre
and in states gain added significance. Budget document will have to factor in
not only the conventional accounting of revenue and expenditure, but will have
to graduate into a more comprehensive text which will give clarity about assets
and liabilities at the beginning of the year, sources and uses of funds across
sectors and the role of each sector, contributing to the GDP growth or draws
resources from the tax revenue, in the economic development of the country. In
essence, budgets should carry the Action Plans that will realise the growth
objectives.
M
G Warrier, Mumbai
*Submitted
version of the letter published in HBL on September 23, 2016
2
Time
management
This refers to the report
“India cannot afford a part-time Defence Minister, Congress tells Modi” (The
Hindu, September 20). There is substance in the plea made by Congress
spokesperson Sunil Kavthankar that ministers need to spend more time on their
primary task of managing the work relating to the portfolios assigned to them.
For that matter, public servants, from the President to the junior-most
government employee at the village level, should give priority to their
assigned work over other responsibilities either political or social. But,
making a demand that they should be sitting tight in their chairs and working
24X7, doesn’t make sense. And mixing personal issues like food habits or an
individual’s preferences to do extra work for one’s constituency or state
dilutes the seriousness of the demand.
Stretching the argument
that India’s Defence Minister should remain in Delhi all through, one may
expect US President not to leave his chamber, as he is in charge of
decision-making on crucial matters at any point of time. Technology has
developed and these days, communicating with anyone on any corner of the world
is not difficult. Still, people in responsible positions including those
holding high positions in major political parties should be in a position to
make themselves available for consultation in times of need, wherever they
happen to be.
Perhaps, Prime Minister
Modi using NITI Aayog as a forum could arrange classes on Time Management for
ministers, senior level executives in government and leaders of all political
parties.
M
G Warrier, Mumbai
3
Needed,
a zero-vacancy approach
This
refers to the report “PM Reaches Out to CJI to Ease Judiciary-Executive
Tensions” (Economic Times, September 19). If the report is true, GOI and CJI
have not been giving the attention the issue of unfilled vacancies in the
judiciary deserved. The rendezvous between PM and CJI did happen and they
discussed pending issues is definitely a welcome sign. But, should initiation
of such a gesture waited for the auspicious occasion of PM’s Birthday? The
delay in making a breakthrough in filling up vacancies in the judiciary,
especially at higher levels is a matter of grave concern.
As of August 12, 2016,
according to media reports, while the Apex Court had a working strength of 38
against the sanctioned strength of 41, the position at lower levels was
alarming. In High Courts alone 478 posts (against a sanctioned strength of
1091) of judges remained unfilled. And, across the country, 2.21 crores of
cases are pending in various courts.
As new vacancies are sanctioned in government and public sector after
due deliberations and most of the time, a year or two later from the initiating
of processes, the existence of large number of vacancies at various levels
directly mean heavy pendency of work. Judiciary’s case is not different.
Government and public sector should move forward to a ‘zero-vacancy’ concept
sooner than later. In such an approach, GOI may have to consider appropriate
legislative measures to enable allowing retiring incumbents to continue
post-retirement, on mutual consent and acceptable terms, till the successor
takes over.
M G WARRIER, Mumbai
4
Sub-urban
transport*
This refers to the
article “Managing city transport” (Business Standard, September 18) by M
Ramachandran. In the short article the writer has brilliantly covered the
efforts of Transport for London (TfL) to provide comfortable transport
facilities in a large city like London. TfL could be a reference model for any
city in the world with the only rider that transport facilities, like any other
service with masses as clientele, will have to take into account the local
needs, geography and economic viability while taking innovative ideas
experimented elsewhere to the drawing board.
In the Indian context, TfL
model which has a mix of walking, cycling and other modes of transport may
perhaps suit some of the Tier II or Tier III cities. This is not because
metropolitan cities in India are bigger than London. The reasons include
inadequacy of space for development of infrastructure including wide roads and
shortage of funds for modernisation of existing infrastructure. But such
constraints should not stop us from thinking differently and modernising
transport system including Railways in a big way.
Having stayed in Mumbai
for the last 30 years, I am witness to the grave injustice meted out to users
of suburban local trains. From tracks to signal systems, from doors of bogies
to toilets in stations the whole suburban Railway infrastructure in Mumbai is
awaiting modernisation. Travel discipline, from entry to platform to exit is
conspicuous by its absence. Overcrowded compartments (including First Class and
Ladies Compartments) are inaccessible during peak hours for Railway Officials
for any checking. Many accidents are caused by passengers trying to enter or
get out of moving trains. While Metros and new airports get priority, safety
and comfort in the suburban locals, which are used by millions of workers
everyday, are totally neglected.
M
G Warrier, Mumbai
*Submitted version of
letter published in BS on September 20, 2016
5
Obstructing
governance
This refers to the report
“Delhi govt. to restart minimum wage talks” (The Hindu, September 18). This is
another instance where the relationship issues between Delhi Lieutenant
Governor(LG) Najeeb Jung and AAP has stalled a measure which would have
benefited several workers in the unorganised sector in the state of Delhi. The
pro-corporate stance of the LG is coming to the fore. It is unfortunate that a
progressive measure like revision of minimum wage is getting sandwiched between
the egos of an individual and a political leadership. If LG is acting under
pressure from above, it will further strengthen the case of incumbent Chief
Minister Kejriwal who is demanding full-fledged statehood for Delhi.
Centre should, in the
prevailing circumstances, appoint a more competent person as Delhi LG who will
act as a buffer between the state government and the Centre by being impartial
and convincing while carrying out his constitutional responsibilities. The
perennial hindrance being caused to governance being caused by Najeeb Jung
belittles the image of the post he holds.
M
G Warrier, Mumbai
6
Wage
issues*
This refers to your
editorial “The minimum wage temptation” (Business Standard, Weekend
ruminations, September 17). By coincidence, the report “Proxy advisory company
finds Sun’s pay cheque for Kavery Kalanithi ‘excessive’” appeared in Business
Standard on the same day.
The concern expressed
about high level of wages affecting cultivation (not just paddy, it affects
entire farm and plantation sectors) in Kerala is real. Kerala’s dependence on ‘less
fortunate’ states for workers and the possibility of such workers outnumbering
the Non-Resident Keralites (NRKs) are issues being discussed in that state. As
regards protection of environment or the damage caused by wetland to dryland,
these issues get exaggerated by certain constituencies for different purposes.
If existing laws get implemented, Kerala will be environmentally safe for
decades to come. Kerala’s environment protection problems are more related to
management of the state’s forests and rivers than paddy fields and plantation
crops. Taking necessary measures to prevent the damage to ecosystems and
‘natural drainage systems’ should be made the sole responsibility of those who
develop land for commercial purposes. While land is parcelled off to builders
and corporates, government retains the responsibility of inhabitants and
drainage/environment protection which should at least be shared by those who
use the land for commercial purposes.
Coming to the report on
excessive remuneration siphoned off by some in private sector, time is running
out for government to have a comprehensive review of wages, income and prices
policy. There is no doubt that excessive regulation will stifle economic
growth. But where corporates, or for that matter citizens, refuse to be guided
by some socially acceptable norms and impose some self-regulation in
profit-sharing and remuneration practices, government will have to enforce
guidelines on remuneration and use of surplus incomes irrespective of whether
the malpractices observed are in public sector or private sector as both the
sectors depend on ‘public funds’ or common man’s savings for resources.
M
G Warrier, Mumbai
*Submitted version of
letter published in BS on September 19, 2016
7
Top
empty
This refers to Manojit
Saha’s report “Urjit Patel stares at Half-empty RBI board” (The Hindu, September
14). GOI’s approach to filling top level vacancies gives an impression that
those responsible for ‘pushing files’ to ensure timely filling up of vacancies
on boards and at the top executive levels are under pressure to delay things.
Political leadership seems to be uncomfortable with strong leadership in
statutory bodies and PSUs (including PSBs). The possible reason being the easy
manoeuvrability in times of need when there are only those holding ‘additional
charge’ or people who want to make sure of their next assignment at the top of
important institutions. Such an approach
has destroyed institutions like Unit Trust of India.
Coming to the limited
issue of vacancies on the central and local boards of RBI and the unfilled top
positions in RBI and PSBs, it is in the national interest to think of a ‘zero
vacancy approach’ for positions of Eds and above. The approach will need a decision
to allow incumbent to continue in position till the successor takes over, except in exceptional situations where a
position becomes vacant due to death or punishment. Tenure of all such
positions should be made 5 years or above which can be made possible by
changing retirement age, where necessary.
M
G Warrier, Mumbai
III
Leisure
This is what Raghuram
Rajan said at St Stephen’s College, New Delhi on September 3, 2016:
“How does the RBI
generate surplus profits? We, of course, print the currency held by the public,
as well as issue deposits (i.e. reserves) to commercial banks. Those are our
fixed liabilities. As we issue these liabilities, we buy financial assets from
the market. We do not pay interest on our liabilities. However the financial
assets we hold, typically domestic and foreign government bonds, do pay
interest. So we generate a large net interest income simply because we pay
nothing on virtually all our liabilities. Our total costs, largely for currency
printing and banker commissions, amount to only about 1/7th of our total net
interest income. So we earn a large surplus profit because of the RBI’s role as
the manager of the country’s currency. This belongs entirely to the country’s
citizens. 3 Therefore, after setting aside what is needed to be retained as
equity capital to maintain the creditworthiness of the RBI, the RBI Board pays
out the remaining surplus to the RBI’s owner, the Government. The RBI Board has
decided it wants the RBI to have an international AAA rating so that RBI can undertake
international transactions easily, even when the Government is in perceived
difficulty – in the midst of the Taper Tantrum, no bank questioned our ability
to deliver on the FCNR(B) swaps, even though the liability could have been tens
of thousands of crores. Based on sophisticated risk analysis by the RBI’s
staff, the Board has decided in the last three years that the RBI’s equity
position, currently around 10 lakh crores, is enough for the purpose. It
therefore has paid out the entire surplus generated to the Government,
amounting to about Rs 66,000 crores each in the last two years, without holding
anything back. This is of the order of magnitude of the dividends paid by the
entire public sector to the Government. In my three years at the RBI, we have
paid almost as much dividend to the government as in the entire previous
decade. Yet some suggest we should pay more, a special dividend over and above
the surplus we generate. Even if it were legally possible to pay unrealized
surplus (it is not), and even if the Board were convinced a higher dividend
would not compromise the creditworthiness of the RBI, there is a more
fundamental economic reason why a special dividend would not help the
Government with its budgetary constraints. Here’s why: Much of the surplus we
make comes from the interest we get on government assets or from the capital
gains we make off other market participants. When we pay this to the government
as dividends, we are putting back into the system the money we made from it –
there is no additional money printing or reserve creation involved.2 But when
we pay a special dividend to the government, we have to create additional
permanent reserves, or more colloquially, print money. Every year, we have in
mind a growth rate of permanent reserves consistent with the economy’s cash
needs and our inflation goals. Given that budgeted growth rate, to accommodate
the special dividend we will have to withdraw an equivalent amount of money
from the public by selling government bonds in our portfolio (or alternatively,
doing fewer open market purchases than we budgeted).”
**************
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