2 min read.Updated: 11 Nov 2018, 09:39 PM ISTAparna Iyer
It would be foolish of the government to shred its credibility merely in order to garner more resources before the elections. The optics of the move are terrible
What would a householder do when its expenses threaten to outstrip income? Dip into reserves, of course. The Indian government is not above this behaviour either. Hence when it looked like its fiscal math was too difficult to manage, the government seems to have hit upon a new reserve, called the Reserve Bank of India (RBI).
The latest string of arguments from the government including tweets of the economic affairs secretary suggest that the government wants to open the debate on whether RBI is over capitalized. The niggling suspicion is it’s a technical way of demanding more money.
What is the government risking in making such an imprudent advance towards the central bank?
It is risking a signal that says the strongest of the public institutions of the country are not safe from the government’s impulsive attempts to garner funds.
It also risks sending a signal to the investor class that between financial stability and government spending, it prefers to ignore the former and support the latter.
Note that the government has joined hands with RBI in adopting certain reforms that had a positive impact on the Indian economy. Recall that this very government had helped RBI in bringing the much desired committee framework for monetary policy. The government also empowered the central bank to adopt an inflation-targeting regime. Both these measures have resulted in bringing down inflation from the high double digits to just about 4% in a span of three years.
It would be foolish of the government to shred its credibility merely in order to garner more resources before the elections. The optics of the move are terrible.
To be sure, the government is well within its rights to demand a bigger transfer of RBI reserves because as the sovereign it owns the central bank. It also has the legal elbowroom through Section 7 of the Reserve Bank of Act, 1934, that allows it to give directions to the central bank.
But central banks need capital and reserves as an insurance against losses. They need reserves to be ready for any crisis that hits the economy. And overall, they need reserves to inspire confidence in their ability to withstand adverse circumstances. What’s more, central bankers are best placed to determine how much of reserves they need.
At the board meeting on 19 November, it is likely that the government would put pressure on the RBI governor on the framework to determine the central bank’s capital among a host of other matters.
The temptation to dip into reserves is always high. But the householder should stick to discipline as reserves are meant for serious contingencies. The government would do well to leave RBI and its monies alone.
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