“Render unto Caesar the things that are Caesar’s and unto God the things that are God’s,” said Jesus. The Judean population of the time were evidently satisfied with the answer. But the RBI and the government seem to have a problem figuring out what belongs in their respective domains.
At stake principally, is the disposition of sums parked by the RBI to the tune of roughly ₹9,22,000 crore of its surplus under two heads: Foreign Currency and Gold Revaluation Account and the Contingency Fund Account. The former comes to ₹6,90,000 crore and the latter, another ₹2,32,000 crore. The government wants to lay claim to all of it or at least the amount that is accounted for under the head, ‘Contingency Fund’.
The RBI thinks otherwise and hints darkly of the ‘wrath of the financial markets’ if the government has its way. The policy experts too, have jumped into the fray with prognostications of rampant inflation and other dire consequences for the economy if the government has its way. So who is right?
The RBI hasn’t helped its cause by resorting to accounting sleight of hand while presenting the financial statements. It masked these appropriations under the head ‘Current Liabilities and Provisions’ instead of showing it under a more appropriate grouping of ‘Reserves and Surpluses’ within the capital funds belonging to the RBI. But that aside, the larger question is this: Do they represent surpluses that the government can legitimately lay claim to?
Let us look at the Contingency Fund. What exactly is it meant for? The RBI says it is meant for as yet unknown contingencies for which it needs a war chest. Then there is another dimension. RBI says it needs a ‘Contingency Fund’ of 12% of its total value of its assets. Now, why 12% and why not 8 or 16%? The RBI response is that expert committees, which had gone into the question in the past, have said so. Now, who are these experts? They’re RBI’s own people such as its officer, V. Subrahmanyam and Usha Thorat, who retired as Deputy Governor. In other words, the RBI is saying, it should be 12% because our ‘own people have said so.’
To be fair, the position was reiterated in later years by another RBI-appointed expert committee headed by the noted finance professional and a former member of the RBI Central Board of Governors, Y.H. Malegam. Even this committee was tasked to come up with an answer to the accounting question of how to present the future balance sheets of RBI! Put differently, an important question of deciding the disposition of future surpluses of the RBI was dismissed as an arcane aspect of debits and credits of financial transactions of RBI.
Now, on the question of Foreign Currency and Gold Revaluation surpluses, it is common knowledge we were practically pauper around 1991.
The foreign exchange reserves, on which we have a valuation surplus of ₹6,90,000 crore as on date, was the direct result of accumulation of gold and foreign currency by the RBI in the last 25 years or so.
This in turn was the result of intervention by RBI in the forex market. Common citizens and private corporations alike, had suffered a loss on their imports as the RBI intervention had the effect of jacking up the rupee cost of their imports. The litre of petrol that you bought at the petrol bunk cost a little bit extra because RBI’s intervention in the forex market led to the rupee suffering a higher depreciation in its value relative to the dollar.
This is nothing but a form of indirect taxation (call it additional customs duty) on the import transactions of the public over the years. So the government wanting to lay a claim on amounts to taxes paid by the public cannot be faulted.
What happens when the rupee strengthens against the dollar in the future and the government has blown away all the valuation surplus? The government can simply impose an additional customs duty to ensure that the rupee cost of import is still sustained at the same level as before when more rupees were required to buy a dollar. Mind you, the odds on the rupee trading at 1993 levels or even at rates that prevailed in 2000 are so low that it would truly be a ‘black swan’ event if it were to happen. So, the RBI has armed itself for a contingency that can only be described as remote.
So, should the government account be now credited with an additional sum of ₹9,22,000 crore for it to be spent on whatever it takes a fancy to? Now, that is a public finance question. The answer from the perspective of accounting theory, however, is an unmistakeable ‘Yes.’
(The author is former Editor, BusinessLine)