Demand for 2-3 trillion sparked RBI-govt clash, says Viral Acharya

Viral Acharya, former deputy governor, Reserve Bank of India.
Viral Acharya, former deputy governor, Reserve Bank of India.


  • Revelation in new prelude to book comes amid calls for increased spending before polls

New Delhi/Mumbai: The Reserve Bank of India refused the government’s proposal to extract 2-3 trillion from its balance sheet in 2018 for pre-election expenditure ahead of Lok Sabha polls in the following year, former RBI deputy governor Viral Acharya said in a new prelude to his book, Quest for Restoring Financial Stability in India published by Penguin Random House India.

This revelation comes amid calls for increased government spending before the general and assembly elections due in 2024, despite marginal growth in the Centre’s tax collections in the first five months of FY24.

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Graphic: Mint

Acharya has for the first time publicly disclosed in his prelude the series of events that led to the differences between RBI and the government that he had first hinted while delivering his speech at the A.D. Shroff Memorial Lecture in late 2018. “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 new prelude is in the updated edition of his book, first published in 2020. It has been exclusively shared with Mint.

Every year, the central bank sets aside a part of its profit, instead of distributing it all to the government, and in three years leading up to demonetization, the central bank made record profit transfers to the government, Acharya said.

During the demonetization year, the expense for currency printing reduced the transfers made to the Centre, resulting in “intensifying " the government’s demand ahead of the 2019 elections, said the former deputy governor. It was effectively an attempt to ensure back-door monetization 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 monetized?"

Another reason for exerting pressure on RBI, Acharya said, was the government’s failure to raise divestment revenues. Divestment shortfall sought to be met via transfers from the RBI is an annual ritual now, he said.

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, which 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.

Matters of “public interest" like this should be openly debated rather than discussed behind closed doors, Acharya argued, explaining the RBI’s decision regarding his lecture.

He said that his lecture contributed to wise counsel prevailing, even if some in the government were displeased, as the government eventually sidelined most of the original proponents of the idea, and established a committee chaired by former RBI governor Bimal Jalan that laid a “reasonable framework" for future transfers from RBI’s balance sheet. One notable example of such a transfer was the one RBI made during the pandemic in 2020, a move that was well justified, Acharya said.

In FY23, the central bank paid dividends of 87,416 crore to the government. It had paid 30,307 crore in FY22.

Besides, Acharya explained how bank balance sheets improved in 2023, as the asset quality review instituted by the Reserve Bank in 2015 to identify bad loans and implement corrective measures was maintained persistently.

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