Subhash Garg explains why RBI's surplus profits belong to the govt

Illustration: Binay Sinha
Former Finance Secretary Subhash Garg is one of those lucky Indian Administrative Service (IAS) officers whose home cadre and home state are the same. In Garg's case, Rajasthan is both. So, we decide to meet at a Rajasthani restaurant in Hotel Ashok. While I am on my way, Garg calls and says he has called the reservations and found that the restaurant was shut a few weeks earlier. As an alternative, we decide upon the Frontier Restaurant, also in Hotel Ashok.

The restaurant is unlike Garg or I have ever seen — while it is well lit, the interior is completely black or dark blue. “Not a very inspiring colour; hope the food is good,” he comments, and I agree. We decide to order before settling in for a chat. Garg orders kulcha.

Garg is a vegetarian, and a teetotaler. “In the Academy, I used to drink occasionally with batchmates. My wife comes from a pure-vegetarian-no-alcohol family. She's a Jain. I used to love onion in my food, so we made a deal at the time of our wedding that she would start using onion in food and I would stop drinking totally. We have kept that deal.”

Garg credits his chartered accountant spouse for always adjusting with his life as a workaholic IAS officer. “She had an established practice in Delhi. When we moved here in 2017 after my taking charge as the economic affairs secretary, she closed her practice, as we felt there could be a conflict of interest.”

Originally from Rewari district in Haryana, Garg’s family was mostly settled in Ajmer and Alwar in Rajasthan. His father served in the telegraph department in these places. “Around 1972, when I was in class 6, my father suffered from depression and was forced to be irregular at work. In those days, mental health issues were not very well known.”

An irregular source of income meant that Garg had to pay for his own education through a national scholarship, and by giving tuitions. Though academically gifted, Garg faced pressure from his father to start earning soon after he passed secondary school. He had five siblings. “My sister is older to us. I was the oldest of the boys in the family. Had I discontinued my studies, I would have had a clerical job at best.”

Garg says he struck a deal with his father that we would be allowed to continue with his studies in return for earning by giving tuitions what he might have if he had taken a steady government job. He completed his cost accounting course as the national topper and later went on to top at the Institute of Company Secretaries of India, too. He then took up commerce and law, simultaneously also preparing for the civil service.

In January 1983, Oil India offered him his first job in its accounts department. Two months after the civil service exam results in June that year, Garg, ranked fourth nationally, joined the IAS Academy. “It all happened normally and in quite a natural manner,” says Garg, two of whose brothers also became civil servants.

A quick recap for our readers: While tensions between the Reserve Bank of India (RBI) and the finance ministry are seen as par for the course, and even considered healthy, when the Department of Economic Affairs under Garg had stated in an internal note that the central bank owed it as much as Rs 3.6 trillion in surplus, it had led to some serious trouble. Meanwhile, in February 2018, the RBI had issued a circular, now infamously known as the ‘Feb 12 circular’, abolishing alternative avenues to deal with stressed assets outside of the Insolvency and Bankruptcy Code, a move that had hit various sectors, especially power.

In an unprecedented move, the finance ministry, in October 2018, wanted to start consultations with the then governor, Urjit Patel, on these and a number of other issues, under Section 7 of the RBI Act. According to Section 7 of the RBI Act, 1934, the central government may issue to the RBI directions — binding in nature — that it may “consider necessary in public interest” after consultation with the RBI governor.

In November 2018, the then deputy governor, Viral Acharya, attacked the government publicly for impinging upon the RBI’s independence, leading to strong retorts from Garg and the then finance minister, Arun Jaitley. The battle between the two institutions, now out in the open, ended with the resignation of Patel in December 2018 and Acharya in January 2019.

“You reached a compromise with your wife on your lifelong food habits, and with your father on your career decisions. Why could you not reach a compromise with the RBI,” I ask, half-jokingly. Garg responds quickly: “You need two reasonable people to strike a compromise.”

Garg is of a firm belief that since the RBI’s profits are largely based on the free sovereign currency resources, and it has no liability of its own, its capital reserves essentially belong to the government.

In 2016, RBI had come up with a new Economic Capital Framework, which, based on certain parameters, assumed that very high levels of capital were required to be retained in the bank. “That led to a situation where, if there was no tweaking of the formula, almost nothing would have come to the government from the 2016-17 surplus,” Garg says.

During the end of the Narendra Modi government’s first term, says Garg, there was a realisation in North Block that a slowdown was coming, primarily in the housing and the banking sectors.

He says that the fundamental tension between the RBI and the government is over what amount of surplus should be retained by the central and what should be passed on to the government. This issue keeps on cropping up every three-four years. The Malegam Committee decided to transfer 100 per cent of the surplus for three years to the government. Garg’s predecessors in DEA, including Rajiv Mehrishi, had also raised the issue of economic capital/surplus distribution with the RBI board.

“There have always been serious differences over the capital requirement of the RBI. I came to know it for the first time when I attended the meeting of the board in August 2017. Though the new Economic Capital Framework was complex, my argument was that it had to be more reasonable, rather than being the most conservative economic capital framework ever adopted by a central bank anywhere in the world.”

On the demand for Rs 3.6 trillion, Garg says the DEA made the calculation based on what should be a reasonable framework on a par with the best practices among central banks globally. “In fact, much before any of these notes were exchanged, the RBI board had agreed that they would review the framework,” Garg maintains.

Garg admits that the February 12 circular led to major fissures between the two institutions. “Unfortunately, the RBI refused to participate in the committee meet headed by the Cabinet secretary to discuss the power-sector resolution issues. That was entirely unexpected.”

“There was no communication breakdown between us and the RBI. We were communicating regularly, but there came a point where we were talking at each other rather than talking to each other. Nothing was getting resolved. There was frustration over how do we get our message across to them.

During its hearings on the February 12 circular, Garg says, the Allahabad High Court had suggested for the first time that the government had the power to use Section 7. This is what gave Jaitley and Garg the idea to seek a discussion with Patel under that Section.

“Dr Patel is a brilliant economist who knows his data very well. But his communication was not the best, if I can put it that way. I think communication was his problem. If you cannot see the holistic picture and remain stuck only to a narrow viewpoint, there is a problem,” Garg says, stressing again that a resolution became difficult because RBI did not want to discuss pending matters at all.

In January 2019, a committee was formed under former RBI Governor Bimal Jalan to review the RBI’s economic capital framework. Garg was part of this panel but by the time the panel had firmed up its recommendations in May-June, he refused to agree to the report. He, in fact, wanted his viewpoint reflected in a dissent note. However, he was transferred to the power ministry in July before the panel signed its report. He sought a voluntary retirement and finished his career with the IAS in October.

The RBI has transferred a record Rs 1.23 trillion of its surplus to the central government for the 2018-19 (July to June) financial year, and an additional Rs 52,637 crore of excess provisions as recommended by the Jalan panel.

“In this committee also, the discussions were polarised around the fundamental point of the usual tension — how much of the surplus should be retained by the RBI. There was a large group that somehow wanted to retain a good part of the surplus. I still believe very clearly that there is no case for the Reserve Bank to retain any surplus. We were expecting Dr Jalan to play the balancing role. At some stage, he also decided to lean on the ‘retain the surplus with RBI’ group.”

“And in that situation, I had no way except to say that, to be intellectually honest, I would record a dissent. I had the right to record a dissent note, like in any other committee,” Garg says, adding that he was not informed why points contained in his dissent note — also part of minutes of the committee meeting — were neither included in the report nor made public as part of the committee’s record.

, which is quite good.

A much publicised part of the panel’s proceedings was that Garg refused to attend one of the meetings. Garg says that was not the case. “There had been a discussion a day prior to the meeting that it would be postponed. Parliament was in session at the time. But then, they decided to hold the meeting anyway and I could not attend it.”

Garg makes his point regarding the hollowness of the case for retaining surpluses with the RBI on the ground of financial stability. “The RBI’s argument is that there might be a financial crisis, the banks may require capital which may not be available from elsewhere and the central bank might have to come to their rescue. The fact is that in 72 years RBI has never lent even a single rupee to banks in times of the many crises they have faced. It is the government that provides recapitalization, not the RBI. And it is most unlikely that public-sector banks would be allowed to default and RBI would have to take a haircut.”

Another controversy which dogged Garg during his tenure at North Block was regarding overseas sovereign bonds. The current finance minister, Nirmala Sitharaman, had announced in her 2019-20 Union Budget that the Centre would borrow from the overseas market. Garg had subsequently said that around Rs 70,000 crore would be raised from such instruments. After heavy criticism from former RBI governors and economists, the government quietly buried the proposal.

“In my judgement, the case for such bonds is absolutely flawless. There is a global savings glut and interest rates abroad are so low. About $15 trillion of bonds are actually enjoying negative rates of interest. We are a capital-deficit country, so it makes a lot of sense if we shift a part of our borrowing to the global market.”

Are there any regrets or anything he could have done better? Garg says he has none.

“These are not the only or the biggest challenges I have faced. In 1995, I was told to take over as the managing director of Rajasthan Roadways. The state transport minister and the chairman were fighting over who could rake in more money. There was rampant corruption. The Bhairon Singh Shekhawat government told me to clean up Rajasthan Roadways. Within 35 days of my arriving there, the corrupt warring factions banded together and sought my ouster on priority. And, I was transferred to the State Insurance and Provident Fund Department, a place where I had to invent a lot of work to keep even a 10-5 schedule,” Garg reminisces with a laugh.

In retirement, Garg is as busy as ever. He has already publicly stated that he wants to set up a policy think-tank. He is also writing articles on various issues and being invited for guest lectures.

“One has to work hard to be able to or to be equal to the job one is doing. Every job in the service you come across honestly requires an enormous amount of hard work. Most of the times you end up being in a completely new field. So, you have to read up to understand the background, you have to understand important issues you have to deal with. It all requires a huge amount of work; that is what is expected of you,” he says as we leave the restaurant.


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