That progress of trade depends on stability is a truism which seldom comes home until it is denied in fact. It is difficult to appreciate its importance to healthy enterprise when government is stable, credit is secure, and conditions are uniform. And yet so great is the handicap of instability that everywhere businessmen have been led by a variety of devices to produce stability in domains enveloped by uncertainty. .. The meticulous precision with which every civilised country defines its standard measures, and the large machinery it maintains to preserve them from deviation, are only evidences of the great importance that an economic society must continue to attach to the matter of providing precision of expression and assurance of fulfilment with regard to the contracts entered into by its members in their individual or corporate capacities”
– Dr B R Ambedkar, PTHE PROBLEM OF THE RUPEE: ITS ORIGIN AND ITS SOLUTION, Butler & Tanner Ltd., London
When the Banking Companies (Acquisition and Transfer of Undertakings) Act was amended in 1969 with a clear objective for banks “to serve better the needs of development of the economy in conformity with national policy and objectives”, it was the biggest infringement on autonomy of not just Reserve Bank of India (RBI) but the entire banking system. Enforcing ‘Socialist’ objectives of the Government led by Smt Indira Gandhi was the main objective of nationalisation. Interestingly, neither Rahul Gandhi nor other critics of the important decision of RBI transferring withheld dividend to the Government and changing the base percentage for reserves, are considering this fact. While discussing the decision of transfer of humongous looking Rs 1.76 lakh crore by RBI, to avoid the distortion, we need to put certain issues in context.
First of all, as the Preamble to the Reserve Bank of India Act, 1934 (the Act) specifies, as the banker of the banks, RBI is supposed to take care of the financial health of the country in terms of currency flow. The autonomy of the decision taken by the apex bank is maintained through the appointment of independent directors and entrusting the authority to decide the Repo Rates from time to time. When the entire world was working with negative interest rates or trying to keep the Repo Rate to maximum 1.5 per cent, thanks to the irresponsible behaviour of the UPA Government and its manipulation with the banking system, RBI decided to keep the Repo Rate between 6.5 to 7.0 per cent, which at times went up to 9.0 per cent. The decision of high rates was justified in the name of curbing inflation. Whether this policy helped in curbing inflation or not is a matter of debate, but this certainly affected the lending capacity of banks. The political intervention to give loans created the problem of Non-Performing Assets (NPAs). The recent corrective measures are to undo the wrongs practised till now.
Now coming to the transfer of funds; it is a known fact that profit earned by the central bank is not kept with the bank and Government, in a way people of the country, has natural ownership over it. Every time we talk about Rs 1.76 lakh crore, it should be reminded that Rs 1.23 lakh crore is the dividend that the RBI has earned in terms of profit and in any case Government would have got that. So the profits earned through not just domestic but international banking transactions are transferred to the Government. When those reserves are meant for Bharat, where is the question of raiding the RBI? The remaining amount of around Rs 52 thousand crores is the amount that is transferred as per the recommendations of the Jalan Committee through the revised economic capital framework that is 5.5 per cent of the total budget of the RBI. Even though we can deliberate on whether this proportion is sufficient to manage contingency, the fact remains that RBI has transferred only Rs 52 thousand crores as per the new mechanism.
The real focus of the debate should be the utilisation of this amount and not the transfer of amount. Though the Government has announced various policy measures to boost the economy, over-reliance on FDI and FII has been the real problem, as these investments will always be opportunistic, profit-fleecing and antithetical to our domestic supply chain. Not just the recapitalisation of banks, but also investing in economic and social infrastructure in such a way that small and medium scale industries, which are the natural employment generators in Bharat, will get the boost. Helping the business houses to come out of the environment of uncertainty should be the prime objective of this amount, besides controlling the fiscal deficit. How the transferred funds are effectively used to make the economy more vibrant and strong, to withstand the pressures of global uncertainties, both economic and strategic level, is the challenge we should face collectively as the self-reliant economy based on innovation, technology and manufacturing is a solution to maintain our say in global affairs.