Swarajya Logo
Swarajya Logo
Politics States Economy Society Business Culture Infra Defence World Books Ideas Science Technology Heritage Archives Legal Movies Sports
  • Our Views
    Politics States Economy Society Business Culture Infra Defence World Books Ideas Science Technology Heritage Archives Legal Movies Sports
  • Magazine
  • Store

About Swarajya

Swarajya is a publication by Kovai Media Private Limited.

Swarajya - a big tent for liberal right of centre discourse that reaches out, engages and caters to the new India.

editor@swarajyamag.com

Useful Links

  • About Us
  • Subscriptions Support
  • Editorial Philosophy
  • Press Kit
  • Privacy Policy
  • Terms of Use
  • Code of Conduct
  • Plagiarism Policy
  • Refund & Cancellation Policy

Useful Links

  • About Us
  • Subscriptions Support
  • Editorial Philosophy
  • Press Kit
  • Privacy Policy
  • Terms of Use
  • Code of Conduct
  • Plagiarism Policy
  • Refund & Cancellation Policy

Participate

  • Contact Us
  • Write for us
  • Style Guide
  • Jobs

Stay Connected

  • Artboard 2 Copy 6Created with Sketch.
    Artboard 2 Copy 10Created with Sketch.
    Artboard 2 Copy 7Created with Sketch.
    Artboard 2 Copy 9Created with Sketch.
  • Andriod Logo
  • IOS Logo

Economy

Neither ‘Loot’ Nor ‘Band-Aid’: Primer On RBI’s Rs 1.76 Lakh Crore Transfer To Government For Rahul ‘Goebbels’ Gandhi

R JagannathanWednesday, August 28, 2019 12:41 pm IST
Former Congress president Rahul ‘Goebbels’ Gandhi.
Former Congress president Rahul ‘Goebbels’ Gandhi.
Former Congress president Rahul ‘Goebbels’ Gandhi.
  • Transferring excess capital reserves from the central bank to the government in the larger interests of the financial system and the economy is neither “loot”, nor “Band-Aid”.
  • It is an investment in stability and growth.
  • The Congress party, which was run by an ace economist for 10 years, seems to have been over-run by economic illiterates these days. The party believes that the Reserve Bank of India’s (RBI’s) decision to transfer Rs 1.76 lakh crore to the government from its surpluses and excess reserves, is akin to “looting” it.

    Interestingly, the party did not think that another Rs 1.76 lakh crore, which the Comptroller and Auditor General of India thought was handed over to private cronies in the 2G spectrum scam, was “loot”. On the contrary, the party’s ace mathemagician, one K Sibal, decreed that there was “zero-loss” to the exchequer. And yet, the transfer of the RBI’s excess reserves, money indirectly belonging to the government as 100 per cent owner of the central bank, is “loot” and not a mere transfer of cash from one pocket to the other.

    The party’s out-of-work Goebbels, a.k.a. Rahul Gandhi, provided us with another gem – a quotable quote devoid of economic logic. Transferring some of the central bank’s excess capital to the government was like “stealing a Band-Aid from the dispensary and sticking it on a gunshot wound.” At Rs 1.76 lakh crore, this is a rather expensive Band-Aid. And the idea, that an economy growing currently at 5-6 per cent, can be said to be suffering from a “gun-shot wound” is laughable.

    Here’s a reality-check for both the loot-and-scoot critics, and those imagining “gun-shot” wounds to the economy.

    First, the taste of the pudding is in the eating. The mere announcement of a transfer of Rs 1.76 lakh crore has brought happy economic consequences, even if only transient. Bond yields are down (10-year GOI is now just over 6.5 per cent), shares are looking perkier (as money gets cheaper, shares get rerated), and the rupee has rebounded against the dollar (from 72.18 earlier, it was hovering around 71.57 around mid-morning on Wednesday).

    Second, the criticism that reducing the RBI’s reserves in the short run will lower the bank’s credit rating – a statement made by none other than Raghuram Rajan, a former RBI governor – is questionable. When banks get recapitalised, infrastructure gets more money, the fiscal deficit is kept within bounds, and capital inflows improve as a result of the economy’s improved prospects, the country’s rating will – at worst – remain more or less where it is.

    The RBI’s own rating is dependent on how solid the fisc looks, since the government stands four-square behind its central bank. A central bank’s own rating is closely linked to that of the country it represents, and not merely its own capital base.

    Even if its rating depended on its own reserves position, the RBI’s contingency and other reserves were a high 25-per cent-plus in 2018, and the Bimal Jalan committee which went into the question of the RBI’s excess capital, called for its maintenance in the range of 20-24 per cent. This is one of the highest in the world. There is no likelihood of the RBI being downgraded anytime soon, unless the capital is continuously depleted year after year.

    The former chief economic adviser, Arvind Subramanian, estimated the RBI’s excess capital reserves to be in the range of Rs 4.5-7 lakh crore. So, even after gifting Rs 1.76 lakh crore, a large part of the excess remains excess. There is a huge cushion left even after the transfer of Rs 1.76 lakh crore from Mint Street to North Block.

    Third, the assumption that cash transfer from the RBI to government is some kind of expropriation is optical, not real. Let’s first understand where the RBI makes its income from. Nearly 95 per cent of its income comes from interest earnings, most of it from banks and government, including earnings from holdings of US treasury and other foreign exchange-denominated investments.

    Roughly one-third of the earnings in 2017-18 came from foreign currency investments, and the rest from holdings on domestic paper, most issued by the government, or from domestic money market operations. While the interest earned of foreign currency assets (on average, just over 1 per cent in 2018) does not belong to the government, a large chunk of the interest earned on government stock and the spread earned on open market operations essentially belongs to the government.

    Reason: if there was no RBI, and the government conducted all its debt and market operations through an arm of the Finance Ministry, the money (or losses) would all be its own. The RBI makes money because the government has outsourced the job of managing money to it, and not because the RBI has any intrinsic business model of its own to bank upon.

    Additionally, the 4 per cent CRR (cash reserve ratio) of banks’ liabilities that the RBI impounds at zero interest, is essentially money for jam. When it lends this money out to bank, the RBI earns interest on deposits it pays nothing for. And if 70 per cent of the banking system is in the public sector, and hence owned by the government, it means the RBI makes money by impounding a substantial chunk of funds owned by government banks.

    This is real loot: it’s like asking you to keep a deposit with me for zero interest, and then lending out the same money to you at a positive interest rate. This is the safest of businesses to be in.

    Four, it is the job of the RBI to keep the financial system in good health. But if the RBI’s own finances are in good health and the financial system is sick, at some point either the government or the RBI will have to bail the latter out. A robust financial system is ultimately in the interests of the RBI’s own financial health. So, using some of its excess capital to strengthen the banking and financial system is like investing in your own long-term health.

    So, Dear Rahul, Dear Congress friends, transferring excess capital reserves from the central bank to the government in the larger interests of the financial system and the economy is neither “loot”, nor “Band-Aid”. It is an investment in stability and growth.

    If Rahul Gandhi really wants to hold the government’s feet to the fire, he should ask for a full account of how it spends the Rs 1.76 lakh crore. That’s really the test for the National Democratic Alliance government when it has got easy access to such a large sum at one go.

    Tags
    Raghuram Rajan
    RBI
    Congress
    rahul gandhi
    Arvind Subramanian
    National Democratic Alliance
    Mint Street
    North Block
    Surplus
    Bimal Jalan Committee
    Capital Reserves
    Band-Aid
    Loot
    Financial System

    Comments ↓

    An Appeal...


     

    Dear Reader,

     

    As you are no doubt aware, Swarajya is a media product that is directly dependent on support from its readers in the form of subscriptions. We do not have the muscle and backing of a large media conglomerate nor are we playing for the large advertisement sweep-stake.

     

    Our business model is you and your subscription.  And in challenging times like these, we need your support now more than ever.

     

    We deliver over 10 - 15 high quality articles with expert insights and views. From 7AM in the morning to 10PM late night we operate to ensure you, the reader, get to see what is just right.

     

    Becoming a Patron or a subscriber for as little as Rs 1200/year is the best way you can support our efforts.

    Get Swarajya in your inbox.


    Magazine


    Swarajya Magazine Cover Image
    Merchandise

    Merchandise


      Politics

      Minority Student Scholarship Scam: Aadhaar-Based Biometric Authentication Helps Uncover 6.7 Lakh Bogus Applicants

      Minority Student Scholarship Scam: Aadhaar-Based Biometric Authentication Helps Uncover 6.7 Lakh Bogus Applicants

      Nayan Dwivedi
      16m

      Jammu-Kashmir Ready To Conduct Elections, Waiting For ECI Instructions: Lieutenant Governor Manoj Sinha

      Nishtha Anushree
      2h

      Owaisi Brothers Urge Voters To 'Avoid Overconfidence', 'Exercise Democratic Rights' As AIMIM Bastions Record Poor Polling Percentage

      Swarajya Staff
      3h

      Economy

      Sorry, Cassandras. India's GDP Could Well Top 7 Per Cent In Fiscal 2023-24

      Sorry, Cassandras. India's GDP Could Well Top 7 Per Cent In Fiscal 2023-24

      R Jagannathan
      5h

      India's GDP Grows 7.6 Per Cent In July-September Quarter

      Nayan Dwivedi
      22h

      India's Fiscal Deficit Stood At Rs 8.037 Lakh Crore In First Seven Months Of Fiscal Year

      Swarajya News Staff
      22h

      Defence

      Indian Navy Makes History By Appointing First Female 'Commanding Officer' Of A Naval Ship

      Indian Navy Makes History By Appointing First Female 'Commanding Officer' Of A Naval Ship

      Swarajya Staff
      7m

      Centre Putting All-Out Efforts To Bring Them Back: Indian Navy Chief On Veterans Sentenced To Death In Qatar

      Swarajya Staff
      43m

      Indian Navy To Conduct One Of Its Largest Naval Exercises — MILAN — Next February; More Than Fifty Countries Expected To Participate

      Swarajya Staff
      4h

      World

      COP28: PM Modi Proposes To Host COP33 In India, Emphasises On Need For Technology Transfer, Clean Energy Supply Chain

      COP28: PM Modi Proposes To Host COP33 In India, Emphasises On Need For Technology Transfer, Clean Energy Supply Chain

      Nishtha Anushree
      6m

      First Indo-Pacific Conference By India, Australia In UK: Indian High Commissioner Denies Government Involvement In Killings Abroad

      Nishtha Anushree
      2h

      'Good And Appropriate, Look Forward To Seeing Results': Blinken On India's Probe Into Alleged Plot To Kill Khalistani Terrorist Pannun

      Swarajya Staff
      5h

      Culture

      Kashi Tamil Sangamam 2023 To Be Held From 17 December To 30 December, Registration Portal Launched By IIT Madras

      Kashi Tamil Sangamam 2023 To Be Held From 17 December To 30 December, Registration Portal Launched By IIT Madras

      S Rajesh
      2d

      M P N Ponnusamy: A Nagaswara Legend Passes Away Almost Unsung

      K Balakumar
      3d

      Streamlined Repatriation: India-US Deal To Fast-Track Return Of Stolen Antiquities

      Swarajya Staff
      4d
      States

      infrastructure


      V Bhagya Subhashini
      1

      Bengaluru Airport: BIAL Reveals Comprehensive Master Plan For T1 Upgrade And T3 Construction By 2030

      2 Mins Read
      Amit Mishra
      2

      Noida Proposes To Build 35 Km Elevated Road Along The Yamuna To Ease Travel To Greater Noida

      2 Mins Read
      Swarajya Staff
      3

      Noida Metro Expansion: DMRC Submits DPR For 11.5 Km Aqua Line Corridor Linking Botanical Garden To Greater Noida Region

      2 Mins Read
      V Bhagya Subhashini
      4

      Chennai Metro Phase II: CMRL Inks Rs 269 Crore Deal With Alstom For 10 Driverless Train Sets

      2 Mins Read