When the RBI objected to Govt's attempt to ‘back-door monetization' of fiscal deficit in 2018

New Delhi: Former Reserve Bank of India (RBI) Deputy Governor Viral Acharya has disclosed the behind-the-scenes events that led to a public clash between the RBI and the government in 2018. These revelations have significant implications for the upcoming 2024 general and assembly elections.

Acharya, in an updated prelude to his 2020 book, "Quest for Restoring Financial Stability," detailed how the RBI had refused the government's proposal to extract a staggering Rs 2-3 lakh crore from its balance sheet in 2018 for pre-election expenditure, just a year before the 2019 Lok Sabha elections.

At the heart of this clash was a plan devised by "creative minds in the bureaucracy and the government" to transfer substantial sums accumulated by the RBI during the tenures of previous governments to the current government's account.

Acharya revealed that the central bank typically allocated a portion of its earnings to reserves, rather than disbursing them entirely to the government. However, the situation changed during the demonetization year when the expense of currency printing reduced transfers to the government, intensifying the government's demand for surplus fund transfers ahead of the 2019 general elections.

Acharya described this move as an attempt to "back-door monetization" of the fiscal deficit, essentially raiding the central bank's balance sheet to finance populist expenditures during an election year.

Another factor driving the government's pressure on the RBI was its inability to generate sufficient divestment revenues. Bridging this divestment gap through transfers from the RBI had become an annual tradition.

When the RBI did not comply with these requested transfers, the government proposed invoking Section 7 of the Reserve Bank of India Act. This section allows the government to issue directions to the bank, in consultation with the RBI governor, if deemed necessary in the public interest.

Acharya emphasized the importance of open debate on matters of "public interest" rather than conducting discussions behind closed doors. His lecture played a role in guiding prudent decision-making, even if it was met with resistance within the government.

Eventually, the government established a committee chaired by former RBI governor Bimal Jalan to formulate a "reasonable framework" for future transfers from the RBI's balance sheet. One such transfer occurred during the pandemic in 2020, which Acharya considered well-justified.

In the fiscal year 2023, the central bank disbursed dividends amounting to Rs 87,416 crore to the government, marking a substantial increase from Rs 30,307 crore in the previous fiscal year.

Acharya also highlighted the positive impact of the asset quality review initiated by the RBI in 2015, aimed at identifying bad loans and implementing corrective measures. This review contributed to the improvement of bank balance sheets in 2023.