It’s hardly a secret that the abrupt mid-term resignation on December 10 of Urjit Patel from the governorship of the Reserve Bank of India (RBI) was because of a dispute about whether the ‘excess reserves’ of the apex bank should be placed at the disposal of the Central government. The complaint of government spokespersons is that RBI under Patel was being abundantly cautious in maintaining overly high reserves.
In his recently published book Of Counsel: The Challenges of the Modi-Jaitley Economy (Penguin), Arvind Subramanian who demitted office as chief economic adviser of the Union government on June 20, writes that the shareholder equity (capital plus reserves) to total assets ratio of RBI is 27 percent cf. the global median of 8.4 percent with some countries including Taiwan, Spain and Brazil making do with ratios of 4-6 percent. According to Subramanian, if the RBI reduces its shareholder equity to the global median, it could pay the Central government a bonus of Rs.7 lakh crore and still have sufficient reserves to manage contingencies. However, it’s important to bear in mind that perhaps the most important duty of the Reserve Bank is to contain inflation. The infusion of this huge amount equivalent to 3.74 percent of GDP into the economy, especially by way of additional subsidies and giveaways rather than investment in infrastructure or capital assets — very possible on the eve of the impending General Election — would uncork the inflation genie and visit havoc upon the economy.
On the other hand, Union finance minister Arun Jaitley has reiterated that the Central government will maintain its budgeted fiscal deficit of 3.3 percent of GDP for 2018-19 independently of any increase in the RBI’s dividend or return to the Centre. According to Jaitley, the additional dividend or bonus amount will be utilised to recapitalise the country’s failing public sector banks (PSBs) whose NPAs (non-performing assets) have risen to a scandalous 12-14 percent of total advances against the prudent ratio of 1-3 percent.
Yet amidst the great clamour, a basic question is being fudged. Why have PSBs, which dominate Indian banking and finance, been reduced to this sorry pass? The blame has to be laid at the collective door of the political class which has ruined India’s time-tested banking system by foolishly nationalising it, appointing favourites as their chairmen and managers to canalise credit to crooked and/or incompetent cronies. Simultaneously bank jobs have also become the preserve of overpaid kith and kin of the ruling neta-babu brotherhood. Despite this, PSB employees have no compunctions about shirking work and calling strikes for the most frivolous reasons.
The obvious remedy is for government to sell away its majority equity in PSBs to seasoned banking and finance professionals. But privatisation of PSBs is an issue against which there is a political consensus. The brotherhood has too much to lose.