RBI’s surplus bonanza

The Reserve Bank of India’s transfer of Rs 1.76 lakh crore from its reserves is a bonanza the Modi government needs to be very careful about utilising. But along the way, some myths need to be dismantled. The RBI was already due to give Rs 90,000 crore as dividend during the current fiscal. The additional windfall is thus Rs 86,000 crore which still remains a substantial sum. Second is that the RBI’s autonomy is not total. As former RBI Governor YV Reddy said, ‘We are totally free within the limits set by the government.’ In other words, monetary policy is not decided by simplistic pie flow charts. Social and political forces have always played an important role.  

Any RBI Governor or his deputy who does not account for India’s political processes has had to quit. This has remained true ever since RBI’s first Governor Osborne Smith paid the price for obduracy as did Benegal Rama Rau during Nehru’s time. And the RBI has lost every decisive battle with the government since then. The ball is now squarely in the government’s court. Beginning with public sector enterprises that are compelled to fork out a special dividend, besides the normal dividend to the inordinately high cess on petrol and diesel, the Modi government has wrung every source for revenue.

The RBI’s reduction of interest rates thrice in succession will ensure that the borrowed money will not cost too much. In the past, the government has frittered away the gains from soft oil prices. It now needs to ensure a commensurate bang for every buck it has commandeered. More so because conditions will become tighter as the world economy is slipping into recession. For starters, it has to practice prudence while kick-starting a massive public spending push, such as re-examining the trend of wholesale conversion of state highways into national highways. And if the money is diverted to bail out corporates or banks in trouble, it would be akin to throwing good money after bad, and this bailout may not remain a one-time exception, as Bimal Jalan has warned it should be.