Viral effect: Arvind Subramanian too has a thing about RBI reserves being used to bridge budgetary deficit

Former chief economic adviser Arvind Subramanian told NDTV’s Prannoy Roy on the channel on 8 December that it would be wrong to raid the Reserve Bank of India (RBI). Incidentally, he was echoing the same sentiments expressed by the RBI deputy governor Viral Acharya, who coined the word ‘raid’ in the context of drawing RBI’s reserves to meet the budgetary deficit. Subramanian went on to make a distinction between using RBI’s ample reserves for recapitalisation of public sector banks (PSBs) and using them for bridging the budgetary deficit. He gave his thumbs up to the former and thumbs down to the latter. Acharya, however, sounded an alarm by citing the example of Argentina where the transfer of $6.6 billion of what was considered as an excessive reserve in the hands of its central bank to the government spooked the market. This was hardly the right warning because Argentina suffered from a very high fiscal deficit that in fact spooked the market which is not the case in India. Subramanian did not mention Argentina while decrying raiding the RBI but he too was wrong in citing an inappropriate and specious reason — that RBI funds should be used more productively in infusing fresh capital into public sector banks (PSBs). Touché! He hastened to add cryptically and in a manner of double-take that infusing fresh capital into the PSBs from out of the funds received from the RBI was, of course, subject to overall banking reforms.

We have been talking about PSB reforms for ages which includes strict adherence to capital adequacy ratio, staying away from behest lending or crony capitalism, asset-liability mismatch (ALM), stressed assets resolution before they go out of hand, etc, but nothing has changed on the ground so much so that we lurch from one banking crisis to another.

In the event, if raiding the RBI, as he puts it, is undesirable then throwing good money after bad is equally foolish. [caption id=“attachment_2309170” align=“alignleft” width=“380”]  File image of Arvind Subramanian. Image courtesy: PIB[/caption] To wit, the latest massive infusion of capital into PSBs of the order of Rs 2.11 lakh crore by the Narendra Modi government surpassed the aggregate capital infusion of the past 31 years, between 1985-86 and 2016-17 — Rs 1.5 lakh crore. To its credit, it must be said that the Modi government cleverly passed the buck onto future governments and generations by floating recapitalisation bonds to the extent of Rs 1.35 lakh crore thus leaving only Rs 0.76 lakh crore to strain its budgetary resources. But it was a financial trickery that wasn’t lost on anyone — it did not hide the fact that good money was being thrown after bad. Period. Subramanian should have taken a leaf out of what Uday Kotak and his new team are doing to IL&FS — shunning fresh capital infusion and instead focusing on selling off units and assets to those interested attracted by synergy with their existing businesses. Even taking massive haircuts which have become the new normal under the Insolvency and Bankruptcy Code 2015 (IBC) is any day preferable to throwing good money after bad. It is, therefore, presumptuous on the part of Subramanian to be judgmental about the end use of the transfer of RBI excessive reserves of the massive order of Rs 3.6lakh crore. It is normal for the government to ask for such transfers and otherwise intervene in its working so long as it did not intrude into its policy-making sphere. Using RBI funds for meeting budgetary deficit is not as sinful as it appears because the RBI is the central government’s baby though they must remain at arm’s length from each other.