GOI and RBI: Together, they can, says Panagariya
Together, they can!*
This refers to the report “FinMin, RBI should ‘come together in the national interest’, says Panagariya” (Business Line, November 9). This is the right suggestion coming from a person who is aware of the goings on but has no mileage to make by taking sides, as of now.
The present relationship issues between GoI and RBI are emanating essentially from disputes over the administration of financial sector regulation and sharing of ‘income’ between the two, which are best resolved in-house, as a ‘divorce’ is no option in the present scenario.
A lot has been debated about invoking Section 7 of RBI Act in the electronic and print media. My limited understanding of law and administrative expediency gives me an intuitive feeling that provisions of Section 7 as they stand now will be useful only for supporting RBI Governor to handle a recalcitrant board, in the unlikely event of his seeking such a help from GoI.
GoI never got the adequacy of the capital and reserves of RBI examined by experts since the inception of India’s central bank till date. But FMs have been having an eye on the reserves accumulating in the RBI balance sheet. It was in this context that Dr Y V Reddy once referred to the impact of sucking out RBI’s reserves dry on the "National Balance Sheet".
The In-house committees of RBI including the Malegam Committee which advised Dr Raghuram Rajan that the reserves were adequate to cover his three year tenure had limited scope to go into the issue with a global perspective. Till some experts who know central banking and are not on the payroll of political masters advise on the adequacy of RBI’s capital (which remains static at a laughable ₹5 crores today!) and reserves of RBI, pressurizing RBI to fund GOI's deficits will not be in ''Public Interest". This should be done before further appropriating the present corpus of RBI’s capital and reserves. Ideally, if a consensus on the issue cannot be reached soon, GoI should allow RBI to plough back entire surplus income arising from the revaluation of assets including gold reserves to Asset Development Fund.
GOI needs to learn to live within its means and muster the strength to tap domestic resources like idle gold and jewelry with individuals and institutions. If GOI has a decent balance sheet, which will allow market borrowing without ''depending” on RBI, the level of reserves needed by RBI can be negotiated. In such a situation, GOI may be able to fund the central bank's losses. It would be very easy to destroy the image of trust and responsibility built by RBI over 80 plus years. Let us not forget SS Tarapore's fears about the death of the central bank. What is at stake is the credibility of the nation.
M G Warrier, Thiruvananthapuram
*Latest information is, a senior official from Finance Ministry has tweeted that GoI has enough money and there was no plan to ask for funds from RBI!