RBI refused Rs 2-3 lakh crore transfer to NDA government in 2018, says former deputy governor Viral Acharya

The Reserve Bank of India (RBI) had refused the NDA government’s proposal to withdraw Rs 2-3 lakh crore from its balance sheet in 2018 for pre-election expenditure ahead of Lok Sabha polls in 2019, former RBI deputy governor Viral Acharya revealed in the prelude of his book. 

Acharya has shared the details about the events that led to the public clash between the government and the RBI in 2018 in the revised prelude of his book, Quest for Restoring Financial Stability, published by Penguin Random House India, as reported by Mint newspaper.  

The book was first published in 2020. In the revised note, Acharya said creative minds in the “bureaucracy and the government” devised a plan to transfer substantial sums accumulated by the RBI during the tenure of previous governments to the current government’s account. 

“Creative minds in the bureaucracy and the government” devised a plan to transfer substantial sums accumulated by RBI during tenure of previous governments to the current government’s account, he said in the prelude. 

This for the first time Acharya openly revealed the sequence of events that resulted in the disagreements between the RBI and the government in 2018. It may be noted that Acharya had resigned from his post six months before his term ended in 2019, a year after Urjit Patel resigned as the RBI Governor. 

The 2018 incident is under focus as demands for higher government expenditure leading up to the 2024 general and assembly elections are being raised, even though there has been a minimal growth in tax collections during the first five months of FY24. 

While the General Elections are due next year, five major states will hold Assembly Elections by the end of this year. 

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. 

Top points Acharya mentioned in his book 

1.    Acharya in his book said every year the central bank sets aside a part of its profit, instead of distributing it all to the government. In three years leading up to demonetisation, the central bank made record profit transfers to the government. 

2.    During the demonetisation year (2016-17), the expense for currency printing reduced the transfers made to the Centre, resulting in “intensifying” the government’s demand ahead of the 2019 elections, Acharya wrote in his book. 

3.    It was effectively an attempt to ensure back-door monetisation of fiscal deficit by the central bank, he said. “Why cut populist expenditures in an election year …. when the central bank balance sheet can be raided and surging fiscal deficits essentially monetised?” 

4.    He further added that the government was exerting pressure on RBI as it had failed to raise divestment revenues. Divestment shortfall sought to be met via transfers from the RBI is an annual ritual now. 

5.    When RBI did not comply with the requests for the transfers sought, a proposal within the government suggested invoking Section 7 of the Reserve Bank of India Act.

Section 7 allows the government to issue ‘directions to the bank as it may, after consultation with RBI governor, (to consider it) necessary in the public interest’, he said. 

6.    Acharya also emphasized the importance of openly debating matters of "public interest" rather than discussing them behind closed doors. 

7.    He further said that his lecture played a role in guiding prudent decision-making, even if it wasn't well-received by some in the government.  

Eventually, the government sidelined most of the original proponents of the idea and established a committee chaired by former RBI governor Bimal Jalan. 

8.    Additionally, Acharya elaborated on how bank balance sheets improved in 2023.
He said this improvement came from the persistent implementation of the asset quality review initiated by the RBI in 2015, which looked at identifying bad loans and implementing corrective measures. 

What had happened in 2018?  

Back in 2018, the NDA government had its eye on the RBI’s reserves but the central bank had resisted efforts to part with them. In fact, a disagreement about making such a transfer was said to be one of the key reasons the previous Reserve Bank of India governor Urjit Patel resigned in December, 2018. 

A few weeks after this, a committee under Bimal Jalaan was appointed to assess the amount of reserves the Reserve Bank of India should hold. 

In fact, a disagreement about making such a transfer was said to be one of the key reasons behind fomrer RBI governor Urjit Patel's resignation in December 2018. 

A few weeks later, a committee under Bimal Jalaan was appointed to assess the amount of reserves the central bank should hold. 

According to news reports, the government was expecting a large payout as a result of this. Initially, the Centre tried to pressure the Jalaan panel to give away a part of the much larger revaluation account. News reports said the Union government was expecting Rs 1 lakh crore from here. 

However, in the end, the Jalaan panel decided to not touch the revaluation reserves and dip only into the (much smaller) contingency fund. 

In 2018, Chief Economic Advisor Arvind Subramanian had said that the RBI had some of the highest reserves in the world and the excess capital the central bank transfer to the Union government stood at between Rs 4.5 lakh crore and Rs 7 lakh crore. 

In 2019, RBI had transferred the highest-ever surplus of Rs 1.76 lakh crore to the government. This was in line with the recommendation of a committee, led by former RBI governor Bimal Jalan, that was constituted to decide how much capital reserves the central bank should hold. 

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