The government has been criticised for asking very high dividends from RBI’s reserves. What are your views on this issue?
Putting pressure on the RBI for allowing a part of the foreign exchange reserves to be used for infrastructure financing is quite different from the dividend issue.
The issue of use of forex reserves for infrastructure came up when I was the finance secretary and Dr Reddy was the (RBI) governor. There was a suggestion that RBI is holding a large forex reserve, which was getting very low returns. On the other hand, private companies were borrowing huge amounts of foreign capital at a high rate for building infrastructure. So, the government of that time wanted the RBI to lend a part of the reserve to corporates for infrastructure projects at lower rates. However, there is a hidden cost. If the country is seen tampering with those forex reserves or diverting them for other purposes, the credibility of the country might get eroded.
The government should not be tampering with the balance sheet of the central bank, because the balance sheet of the central bank needs to be strong to inspire confidence.
On the dividend issue, I wouldn’t call it an infringement on the autonomy of the RBI. Under the institutional arrangements, the RBI does make a surplus. Making profit is not one of the objectives of the RBI. Under the law, the RBI is allowed to put away part of surplus for building reserves for stability and then give the rest to the government as dividend.
The government because of its own fiscal needs asks for more dividends. The Centre’s grudge is that RBI is fortifying itself more than necessary. This has always been an issue — during my time when I was the finance secretary, and when I was the RBI governor. But I think this is an issue that can be settled amicably.
You have discussed the issue of rift between the Centre and states for resource allocation. What is your view on the whole issue of fiscal federalism?
The Centre-state issues are there in every Federation, they’re not unique to India. They are in developed countries like the US, Canada, they’re in less developed countries like South Africa, Ethiopia, India, and China. So, these issues are common everywhere. I don’t think they will go away. The important thing is whether we have institutional arrangements for resolving these issues amicably, without too much politics coming in.
In India, we have institutional mechanisms to address this issue. We have the Finance Commission, which decides on the Centre-state issues. We have a mechanism for the central government deciding how much debt they should borrow, and when they can borrow, we have the FRBM Act. I am not suggesting that these are foolproof, but we should be able to resolve them, even if the existing institutions are inadequate to resolve them.