RBI Fund Transfer: ‘Another Indicator of Compulsive Dishonesty of Govt'

'...there is a case for autonomy [of central banks], for sure. And that autonomy is important for all institutions, and that autonomy in the central bank in India was dead, certainly, in November 2016, when demonetisation was announced. Because it was very clear at that time that this was a decision taken against the wishes of the RBI, imposed on the RBI, which then had to implement something, which it did very badly. Which it had absolutely no knowledge of, and no preparation for. So my concern is not really about whether India's central bank is independent or not, but really what is done in terms of the policies. And I believe that both the central bank and the government need to be accountable.

What is really the problem in India today is that we have a completely unaccountable government. We have a government without accountability in any of its decisions. Of course, in the other decisions, but certainly also in economic policy decisions. And the economic mess we are in also partly stems from that. Now, that's the context in which I see this transfer of funds. Let me confess I do not think that this is a loot of the RBI... The Jalan committee recommended a certain range - 5.5 to 6.5% of the balance sheet to be kept as reserves. The RBI decided to go with the lower range of that because it suits the government. So yes, absolutely, the RBI was doing the government's will. If it were the case of an accountable government I would have no problems with that...

Now what does this transfer of money actually mean? Remember this is not the foreign exchange reserves being transferred - those cannot be transferred according to the Jalan committee's recommendations. It is the contingency reserves that are kept for various things. You could argue 5.5% may be a little low. But it is the international standard. It's not, in that sense, a big deal. The critical issue here is, what does reserve business mean? Supposing the RBI suddenly needs more liquidity - more resources - what can it do? Well, it can print money. So, let me remind you: macroeconomically speaking there is zero difference between transferring RBI reserves and printing money...

And what we used to call the "monetised deficit"... a certain part of government finances that was not met through various revenues - taxes and other things was done by printing money. Deficit financing as it was called. And that monetised deficit was the government borrowing from the central bank money that it printed. At relatively low interest rate. What is happening today? In those days, the government borrowed from the central bank a certain amount; now the central bank is handing over some money to the government. Macroeconomically speaking there is no difference... if the concern is that this will be inflationary, I don't believe that is a concern either...

The big issue really is what is done with this money. Just like the big issue really should be what is done with all money that the government spends. That is what we, as trade unions, as progressives, as people who want something good to come out of economic policy - that's the question we should be asking. What's going to happen to this big transfer... It turns out that the government was basically lying in the budget. That should have been a major outcry. You can't lie to parliament, surely. But it was openly lying to parliament. It was openly declaring tax revenues that it had not received, and that it knew it had not received. It was openly declaring expenditures that we don't know whether they've made or not. But according to the provisional actuals of the CGA, they have not made.

So it was openly lying. But that lying, that discrepancy, came to 1.67 lakh crores. So, very close to 1.7... Now, what did they do in this budget that the presented in July? They pretended that in fact they had got that full amount. They knew that they hadn't got as much as 1.67 lakh crores, which is something like 1.3% of GDP - a huge amount. They pretended they've got that money in the previous year, and they said that we are going to increase tax revenues by a further 14%. That is the projection in this budget... Now, that's not going to happen, obviously. In fact, they are not going to even meet the level that they hoped to last year. Because they had already massively overestimated what they were going to get last year because they have made a complete mess of the GST, and because... demonetisation continues to impact not just the informal economy, but now also the formal economy. The continuous stagnation of wages, the decline in agricultural incomes - the terrible impact that demonetisation had and now GST has had - have all actually meant that the economy's in terrible shape - tax collections are not going to improve. They are going to be much lower.

So, what will this money do? It is basically going to dress up the budget... Frankly it will not even dress up the budget that much. Because in this same budget where they were pretending they are going to get 14% over that inflated number of last year, they have also already provisioned 90 thousand crores of money from the RBI... So the additional amount they are getting is only about 80 thousand crores, which is not that much and is not going to meet their revenue shortfalls.

So, when Nirmala Sitharaman says we cannot tell you where the money will go she is in a way kind of being honest. She knows it is going to go into that bottomless pit which is the massive deficit that they have created, because they have messed up public finances like no government before them. I think the real problem with all of this is that it is yet another indicator of the compulsive dishonesty of this government. Instead of saying clearly that this is equivalent to deficit financing because we are basically adding to government resources in a situation where we are not able to make it up with our revenue collection - that's really what it is... It's just that now we are also steeped in the neoliberal mindset that deficit financing is this big crime - you can't do it and financial markets will be unhappy. So you have to pretend that you're not doing that - that the RBI is giving you some money out of the goodness of it's heart. Instead of coming clean on that, they are positioning it in this way, and further messing up our public finances...

I do want to add one more thing about issues related to the RBI and banking which I just came across today... it is an article in the Indian Express today on the inter-ministerial panel on FinTech. Basically what this panel has suggested is that they should now allow virtual banks and prepare for a possible future scenario where banks do not need to set up branches. But they can deliver full-scale retail banking services from extending loans, savings accounts, issuing cards, offering payment services through their app or website... Why does this matter? It's already happening. Somebody I know, a domestic worker in my campus needed to actually get an ATM card because she was told that she will incur bank charges on every withdrawal she makes otherwise. So she went to get an ATM card, she got her ATM card, and she was told that the PIN can only come to her from an OTP on her mobile phone. She says, I don't have a mobile phone. And they say, well too bad, link it with a mobile phone. Because otherwise you will not get an OTP and you cannot use an ATM. What does this mean for all the millions of people across India who do not have mobile phones - that's still 40% of the population. What does it mean for people who cannot access, or where connectivity is so poor... What does it mean in Kashmir, where they have no communications for a month. What are we doing in terms of forcing people into using technologies that can be turned off at the whim of the government?...'