Pressure on RBI to part with funds

BRP Bhaskar

Gulf Today

The Reserve Bank of India, which is banker to the Central and State governments and regulator and supervisor of the country’s monetary system, is under pressure from the Modi administration to pass on to it a big chunk of its reserves.

According to media reports, the Finance Ministry wants the RBI to transfer to the Centre Rs 3,600 billion out of its reserves of Rs 9,590 billion, and it says no.

More ominously, the Ministry wants joint management of the reserves by the Centre and the RBI. This will not only destroy the RBI’s autonomy and inhibit its ability to perform its functions well but also allow the government easy access to the central bank’s reserves which play a critical role in ensuring the nation’s financial security.

Initially, the government did not deny reports about its differences with the RBI. On the contrary, it virtually confirmed them and offered palpable justifications for threatening the RBI’s autonomy.

It argued that the RBI had overestimated its requirements of reserves, and could do with much less than what it holds now.

It also claimed the RBI’s existing economic capital framework was determined by its board of directors at a meeting at which two government nominees were not present.

As the Opposition parties and financial experts criticised the government for attempting to erode the RBI’s autonomy and reports circulated that RBI Governor Urjit Patel was preparing to quit, the government began a damage control exercise.

Subhash Chandra Garg, a Secretary in the Finance Ministry, in a tweet, described the reports as “misinformed speculation” and said there was no proposal to ask the RBI to transfer Rs 3,600 billion or even Rs 1,000 billion.

However, Prime Minister Narendra Modi and Finance Minister Arun Jaitley said nothing that could reassure critics.

One of the two directors nominated to the RBI board by the government recently is S. Gurumurthy, a chartered accountant better known as an ideologue of the Rashtriya Swayamseval Sangh, the ruling Bharatiya Janata Party’s mentor.

Reacting to the media reports, the RSS said the Governor should cooperate with the government or quit.

Set up by the colonial administration in 1935, the Reserve Bank of India’s functions include formulation, implementation and monitoring of monetary policy and laying down the broad parameters within which commercial banks must operate.

Successive Central governments have respected its autonomy, recognising the need for it to be free from political control to discharge its onerous responsibilities.

The RBI has an equity capital of only Rs 50 million but pays the Centre a handsome dividend each year. The dividend for the current fiscal is Rs 500 billion.

The RBI is one of the few central banks of the world which regularly updates its history. It has so far published four volumes which cover its working from 1935 to 1997.

Chicago University professor Raghuram Rajan, who, while serving as Chief Economist at the International Monetary Fund in 2005, had forecast the 2008 crisis in the US financial system, was the RBI’s Governor when Modi became the Prime Minister in 2014. His monetary policy helped check inflation and raise foreign exchange reserves.

When Modi consulted the RBI on his demonetisation plan of 2016, Rajan advised against it and warned of potential negative effects. Although he was ready to serve another term, Modi decided to look for someone amenable. Rajan returned to his Chicago University job.

Last week, on the second anniversary of demonetisation, Rajan said the world economy had picked up last year but India could not do as well as it should have done because of the disruption caused by the note ban and the hastily introduced Goods and Services Tax.

While the government’s publicly advanced argument for seeking RBI funds is that the central bank has more reserves than it needs, the real reason maybe something else. Either it is experiencing a cash crunch, which it is unwilling to acknowledge publicly, or it is looking for funds to launch populist schemes ahead of next year’s parliamentary elections.

Another indication of its urgent need to raise money is the reported decision to sell company shares which were declared “enemy property” after the shareholders left for Pakistan or China following the wars with these countries. Their current worth is estimated at more than $400 million.

Whether the government will press ahead with the plan to squeeze money out of the RBI or pull back will be known when the bank’s board of directors meets next Monday. --Gulf Today, Sharjah, November 13, 2018

A miracle maker bows out

BRP Bhaskar
Gulf Today

With Raghuram Rajan, Governor of the Reserve Bank of India, who provided a calm environment for the economy through skilful management of monetary policy, quitting in September, the path is clear for the Narendra Modi administration to bring another autonomous institution under its heel.

The rupee was falling against the dollar and inflation was ruling high when the Manmohan Singh government picked Rajan to head the RBI in 2013. He steadied the rupee and brought down retail inflation.

The rupee’s movement against the dollar was held in the narrow range of 66.02 to 67.09. The inflation rate was brought down from 10.5% to about 5% in two years. In the past year it has moved up but still remains below 6%.

Rajan worked the miracle mainly by using the RBI’s right to fix interest rates. Initially he raised the repo rate (rate at which the central bank lends money to commercial banks) and reverse repo rate (rate at which the central bank borrows from commercial banks), against the wishes of the government. After stabilising the monetary system, he reduced the interest rates, but not to the extent the government desired.

In the favourable atmosphere he created the GDP grew from 5.6% in 2012-13 to 7.6% in 2015-16, foreign exchange reserves rose from $275 billion to 363 billion and the current account deficit fell from 4.8% in 2013 to 1.1% last year.

Rajan is credited with having forecast the ongoing global financial crisis three years in advance. Speaking at a function to honour outgoing US Federal Reserve Chairman Alan Greenspan he had said a disaster was ahead. Recalling his words, IMF chief Christine Lagarde said last year, “The world should have listened to him.”

Economists and financial analysts say the effect of Rajan’s departure will be felt in the years ahead. However, he disapproves of personalisation of the office and says the RBI will survive any governor.

A product of the Indian Institute of Technology, Delhi, the Indian Institute of Management, Ahmedabad, and the Massachusetts Institute of Technology, USA, Rajan served as Professor at MIT’s Sloan School of Management and Chief Economist at the International Monetary Fund before returning to India in 2007 to head a committee on financial sector reforms. He later became Chief Economic Advisor to the Government.

At the RBI, he was often at loggerheads with the government as it kept pressing him to lower interest rates to raise the growth rate. He resisted, pointing to the high fiscal deficit and possible price rise. After the change of government, the pressure on him increased as Modi was in a hurry to push up the growth rate and usher in the good days he had promised in his campaign speeches. Rajan started relenting but the quantum of rate cut always remained below the government’s expectations.

The government responded by attempting to tamper with the RBI’s autonomy. It proposed the creation of an independent debt management office. As Rajan objected, the move was dropped.

The government then planned to transfer part of the power to regulate the bond market from the RBI to the Securities and Exchange Board of India. The SEBI’s opposition forced the government to drop that too.

Thereafter the government sought to reduce the RBI to the level of certain other financial sector regulators. The RBI’s protests resulted in stalling of the proposed changes.

The Establishment’s unhappiness with Rajan came into the open when Bharatiya Janata Party leader Subramanian Swamy called for his removal a few months ago. He was believed to be acting at the instance of the Rashtriya Swayamsevak Sangh, the power behind the Modi government.

The RSS, which is quite innocent of monetary policy, was apparently incensed by his remarks on the growing intolerance after the lynching of a Muslim at Dadri in Uttar Pradesh for allegedly eating beef. “Tolerance and mutual respect are necessary to improve the environment for ideas, and physical harm or verbal contempt for any group should not be allowed,” he had said in a convocation address at IIT Delhi.

The government, which habitually hypes its record, was peeved with his comparison of the Indian economy to the fabled one-eyed king of the land of the blind.

When the government constituted a search committee to find a candidate to fill the vacancy that will arise when Rajan’s tenure ends it became a clear indication that he would not get an extension. In a note to RBI staff last week he announced his decision to return to academia when his current term ends.

“My ultimate home is in the realm of ideas,” Rajan said in that note. Such a man is, no doubt, a misfit in an administration which delights in surrounding itself with mediocrities.

As Rajan takes the bow some of the tasks he began remain unfinished. One of them is cleaning up of the balance sheets of public sector banks that are weighed down by bad debts, a process he had described as a deep surgery. Another is the formulation of a monetary policy framework. -- Gulf Today, Sharjah, June 21, 2016.

Recycling of hidden money

BRP Bhaskar
Gulf Today

Another black money chase has begun with the leaked Panama Papers revealing the names of more than 500 Indians linked to companies registered in tax havens.

It is widely believed that corrupt politicians and bureaucrats hold black money abroad but these documents contain no big names from these categories. The only politician named in them is Anurag Kejriwal, who was President of the Delhi unit of the small Lok Satta Party, founded by former bureaucrat Jayaprakash Narayan, until his expulsion two years ago.

This does not necessarily mean the politicians are a better lot than the public imagine. The Panama Papers came from just one of the many firms facilitating offshore accounts.

The best known names in the papers are those of Bollywood veteran Amitabh Bachchan and his daughter-in-law and former Miss World, Aishwarya Rai, a star in her own right.

Bachchan claimed someone might have misused his name. Aishwarya Rai’s media advisor told the Indian Express, which was involved in the global media investigation of the leaked papers, that the information was false.

The Indian Express said the documents showed that Rai, her father, mother and brother were appointed directors of a firm registered in the British Virgin Islands in 2005. Her status was later changed from director to shareholder. Still later the name was shortened to A. Rai “for reasons of confidentiality”.

Most of the persons are businessmen. The big ones include Samir Gehlot of India Bulls and KP Singh of DLF, both of whom are realtors, and Vinod Adani, elder brother of Gautam Adani, who reportedly looks after the Adanis’s foreign operations. Shishir Kumar Bajoria, a Kolkata industrialist who joined the Bharatiya Janata Party after being associated with the Communist Party of India (Marxist) for many years, also figures in the list.

The businessmen whom the Indian Express contacted said they were not involved in any illegal activity. They may well be telling the truth, for the laws of the land permit Indians to own companies and park money abroad in accordance with guidelines issued by the Reserve Bank of India.

Some of the offshore company owners are Non-Resident Indians who are not subject to Indian regulations. Under the RBI’s remittance scheme, drawn up to help service overseas requirements for purposes of education and medical treatment, as it now stands, even a Resident Indian can put in up to $250,000 a year in 100 per cent subsidiaries and joint ventures.

As soon as the Panama Papers came to light, former Supreme Court judge MB Shah, who heads a special investigation team on black money constituted by the government in 2014, asked it to ascertain if the Indians’ offshore activities were in accordance with the RBI guidelines.

If they acted with the RBI’s permission, it was legal, Justice Shah said. Otherwise action could be taken. The process would take time.

According to media reports, Prime Minister Narendra Modi does not want the Shah team to go into this matter as it lacks expertise to deal with the complex modus operandi of offshore operators. He asked a team comprising officials from different agencies to probe the matter and give him a preliminary report within 15 days.

In his 2014 election campaign, Modi had repeatedly lambasted the Manmohan Singh government for not taking steps to bring back the black money hoarded abroad and declared he would bring it all back within 100 days if he became the Prime Minister. The Opposition has been taunting him since the expiry of the deadline.

Not that the Modi government has done nothing. Last year it passed a law to give black money holders an opportunity to come clean, paying taxes. Some 644 persons, mostly IT professionals, doctors and small businessmen, revealed concealed income of Rs 41.64 billion and paid Rs 24.28 billion in tax and penalties. A second tax compliance scheme is planned for this year.

Some estimates put Indians’ illegal foreign holdings at $1 trillion. Few expect the big operators to respond to tax compliance schemes since they seem to be able to send black money abroad and bring it back laundered when needed.

One analyst wrote recently that black money is no longer static. It moves on the click of a mouse to chase better returns.

According to former Central Board of Direct Taxes Chairman R Prasad, scam money sent abroad was coming back through routes such as foreign direct investment, foreign institutional investment and fake exports. The fact that about two-thirds of the foreign investments of the last 15 months came from small countries like Mauritius, Singapore, Cayman Islands and Cyprus appears to bear this out.

Troubled banking system

BRP Bhaskar
Gulf Today

How healthy is India’s banking system, especially its large public sector component? The question has assumed significance following reports that state-owned banks wrote off bad debts to the tune of Rs 2,110 billion between 2004 and 2015.

Based on material provided by the Reserve Bank of India, the country’s central bank, in response to a Right to Information query, the Indian Express said the banks had written off as much as Rs 1,141.82 billion in the last three years alone. Bad debts which stood at Rs 155.51 billion in March 2012 had shot up to 525.42 billion by last March, it added.

Public sector units dominate India’s banking sector. The British-owned Imperial Bank of India, which the government took over in 1955 and renamed State Bank of India, is the country’s largest commercial bank. It now has more than 16,000 branches, including 191 abroad. Its assets stood at Rs 20,480.80 billion a year ago. Banks set up by former princely states function as its associates.

Fourteen large private banks were nationalised in 1969 and six more in 1980.

The SBI topped the list with write-offs of Rs 400.84 billion in the last three years. The Punjab National Bank, the second largest bank, stood next with a write-off of Rs 95.31 billion.

Responding to media reports, the Finance Ministry, the RBI and the SBI said loan write-off was basically a technical exercise to cleanse the balance sheet and achieve taxation efficiency. It was done at the head office level and did not preclude the branches from continuing recovery efforts.

However, many financial analysts voiced concern over the rise in bad debts and the recent fall in bank share prices. RBI Governor Raghuram Rajan accused critics of making claims bordering on scare-mongering. He attributed the fall in share prices to the turmoil in the world markets but conceded that the performance of some banks, particularly public sector units, was not pretty.

There may be no need for panic, as Raghuram Rajan says, but there is certainly cause for worry. The RBI recently put the value of banks’ stressed assets (including restructured loans) at Rs 7,400 billion. This means 10.9 per cent of all loans is stressed. Standard and Poor’s has forecast an 11-to-12 per cent growth in stressed assets during the year.

The issue of bad debts was a well-kept secret until the All India Bank Employees Association released a list of top defaulters in 2014. It contained names of 406 account holders who owed the banks Rs 703 billion.

Liquor king Vijay Mallya’s Kingfisher Airlines headed the list with debts of Rs 26.73 billion. The Winsome Diamond and Jewellery Company was a close second with debts of Rs 26.60 billion.

Among the other big defaulters was a construction company owned by KS Rao, who was Textile Minister in the Manmohan Singh government at that time. Raghavendra Rao and Deepak Puri, two businessmen whom the government had honoured with Padma awards, also figured in the list.

The AIBEA said bad debts of public sector banks had risen from Rs 390 billion in 2008 to 2,360 billion in 2013.

It alleged that banks, including private and foreign ones, had written off loans totalling Rs 2,040 billion between 2001 and 2013 under political pressure. It asked the RBI to publish the names of defaulters and demanded enactment of legislation to improve the recovery process and to make wilful default a criminal offence.

Raghuram Rajan, professor of finance at the University of Chicago and a former chief economist at the International Monetary Fund, took several steps to help the banks deal firmly with defaulters immediately after he took over as RBI governor in 2013. Guidelines issued by the RBI allowed banks to convert debt into equity and take control of defaulting companies if debt restructuring failed. The banks could then find new promoters to run the companies.

The Modi government, which assumed office the following year, announced a seven-point programme to revive public sector banks. It has only been implemented partially.

The latest debt figures indicate that the steps taken by the RBI and the government have not yielded anticipated results. The government told Parliament last year that 30 top defaulters owed public sector banks Rs 951.22 billion. This was more than one-third of their non-performing assets.

The name-and-shame policy adopted by some banks also does not seem to have had any effect on the defaulters.

The RBI and the government must urgently come up with foolproof measures to ensure the good health of the banks with a view to safeguarding the interests of the depositors and honest borrowers. --Gulf Today, Sharjah, February 16, 2016.

Taking the glitter off gold

BRP Bhaskar
Gulf Today

The Indian government is eager to check the people’s hunger for gold as large-scale import of the precious metal is upsetting its efforts to hold down the current account deficit (CAD), which represents the gap between the value of imports and exports.

Early last year the government had doubled the import duty on gold to four per cent after the CAD rose to a record 4.2 per cent of GDP, pushed up by gold imports of $50 billion. Following this, gold imports declined: in the first quarter of 2012, they were 18.4 per cent less than in the corresponding period of the previous year and in the second quarter 30.3 per cent less. In the third quarter, imports registered an increase of nine per cent but there was no increase in 2012 as a whole.

However, the government worried since a mid-year appraisal showed the CAD had risen to 4.6 per cent of GDP in the first half of the fiscal and that gold imports of $20.25 billion were a major contributory factor.

Thanks to investment inflows — $12.8 billion in foreign direct investment and $1.7 billion in foreign institutional investment — the government could manage the CAD without dipping into the foreign exchange reserves. In fact, there was a marginal increase of $40 million in the reserves. Yet policy-makers agonised over the fact that if only gold imports had been halved the increase would have been more than $10 billion.

The United States topped the 2012 World Gold Council (WGC) table of holdings of countries with a massive hoard of 8,133.5 tonnes. Germany, with 3,396.3 tonnes, was a distant second. India was at the 11th place with 557.7 tonnes.

In private gold holdings, India led the rest of the world. The WGC estimated early last year that Indian households held 18,000 tonnes of gold. Later in the year it revised the figure to 20,000 tonnes of gold, valued at $1.16 trillion. This is equal to two-thirds of GDP and more than 70 per cent of market capitalisation of India’s listed shares.

The WGC estimates of non-governmental holdings do not include the gold content of the vast treasures of religious institutions. The enormous wealth hoarded by Hindu temples in the northern parts had attracted looters from across the border in the medieval period. Until recently the Venkateswara temple at Tirumala in Andhra Pradesh, which possesses gold, coins and other valuables worth Rs320 billion, was believed to be the richest shrine. It lost the honoured place recently when some vaults of the Padmanabhaswami temple at Thiruvananthapuram, capital of Kerala, opened on court orders, revealed a dazzling collection of gold and other valuables. Some observers believe its assets may be worth Rs1.2 trillion. How much of it is in gold will be known only when an inventory which a team of experts is preparing is ready.

India’s infatuation with gold has a long history. There was a continuous flow of gold into the country through trade surpluses until the 17th century, when colonial plunder began. As economic uncertainty gripped the society, the appeal of gold as a means of ensuring security grew. Apart from economic factors, cultural and religious traditions also drive the demand for gold.

The government wants to take away the glitter of gold with a view to depressing demand and reducing imports.

Last year the Reserve Bank of India, the central bank which supervises monetary affairs, set up a working group to ascertain whether large-scale gold imports are a threat to external stability. It was also asked to look into the working of non-banking finance companies, which lend against gold, and check if they posed a threat to the financial system.

The working group saw no systemic issues but recommended dematerialisation of gold. It proposed that gold-backed financial instruments be designed to reduce the demand for gold. Its recommendations are now in the public domain and the RBI has given the public time till January 18 to respond to them.

The government is keen to give effect to its proposals. Its stance can be seen in the context of the current push for economic reform. The WGC has been asking countries hit by the economic downturn to use a portion of their gold reserves to back sovereign debt. With WGC support Indian corporate giant Reliance has drawn up a plan which offers people the opportunity to accumulate physical gold using a daily price averaging methodology. --Gulf Today, Sharjah, January 8, 2013.