Das' capital: Whose money is it anyway?

As a result of this transfer, the RBI's ability to help a set of collapsing banks has come down and the govt's ability to pay its creditors has gone up

Every now and then the near-complete ignorance of the events of even the last 20 years, let alone the more distance years, leads commentators and politicians to get into a frenzy. In August alone there have been two instances of this.

The first was the complete dilution of Article 370. Everyone became an expert on its history and the Constitution. The result was hilarious.

The second has been Monday’s decision by the Reserve Bank of India (RBI) to transfer Rs 1.76 trillion of its reserves to the government. Everyone has now become an expert on the subject.

As is its habit these days, the Congress has been the most vociferous critic of the decision. Its former president, who happens to be the son of its current president, who is the mother of the former president, has made some typically clever remarks.
 

Had he been properly tutored, however, he would have known that the process of casting covetous eyes at the RBI’s reserves had begun when his father was prime minister -- also Congress president.

The year was 1986. Rajiv Gandhi wanted the government to lead an investment spree to force up the GDP growth rate from around 4 per cent to over 6 per cent.

But given the government’s various expenditures there wasn’t much money to do this. So his finance secretary, S Venkitaramanan asked the RBI to transfer more of its surplus. Until then, and for a very long time before, the RBI had been transferring Rs 250 crore every year.

The then governor, R N Malhotra – who like Venkitaramanan had also been finance secretary – refused. There the matters rested until in 1991 Venkitaramanan became the governor.

Like now, the government was in dire financial straits. The finance minister was a man called Manmohan Singh who would go on to become prime minister.

He asked a willing Venkitaramaman to give the government some money and received a nice dollop. The transfers have been increasing every year since then. In the 2019 budget the government assumed that it would receive Rs 90,000 crore. In the previous four years it had received almost Rs 2 trillion.

The current governor, Shakti Kanta Das, acting on the advice of a former governor and deputy governor, has added another Rs 86,000 crore to the Rs 90,000 crore.

As a result the RBI’s fire-fighting reserves – called contingency reserves – have come down from around 7 per cent to below 5 per cent of assets. The target set by another former governor in 2006 was 12 per cent.

In a nutshell, therefore, the RBI’s ability to help a set of collapsing banks has come down and the government’s ability to pay its creditors has gone up. The RBI’s contingency fund has thus been used to meet the government’s contingency.

Commentators and politicians have mostly criticised this without asking the most basic question which I had raised last year: whose money is it anyway?

The answer, in no uncertain terms, is this: it is the government’s money because it arises from seignorage which is a sovereign function. So, since the money belongs to the government, it has a perfect right to take it, in the amounts it requires, and for whatever purpose it needs.

The rest is a matter of management detail.

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