As the Reserve Bank of India (RBI)'s board meets today to thrash out the many differences it has with the government, one of the key points of contention is the government's alleged demand for transfer of Rs 3.6 lakh crore of the central bank's reserves to itself.
Even as the reports of demand for transfer of additional reserves has created a lot of buzz with opposition parties blaming the government of playing with the independence of autonomous institutions like RBI, a section of economists have a slightly less rhetorical view on the issue.
While the former chief economic advisor (CEA) Arvind Subramaniam had said in the last year's Economic Survey report that the RBI is already exceptionally highly capitalised and there is no particular reason why this extra capital should be kept with the RBI.
"In fact, it is one of the most highly capitalised central banks in the world. So, it would seem to be more productive to redeploy some of this capital in other ways," he had said.
He was of the view that the excess capital could be used in several good ways -- for recapitalising the banks and extinguishing debt to demonstrate that the government is serious about a strong public sector fiscal position.
He was, though, not in favour of using it for meeting expenses as he says "the uses to which this is should be of a balance sheet nature".
Arvind Virmani, the former CEA, also says that the demand for higher share of current profits to be paid as dividends to the government is a legitimate demand. However, he says it would be a gross fiscal irresponsibility to convert legacy accumulated reserves into dividends for use for current expenditures.
However, he feels the use of excess reserves to write off past loans from RBI to the government would help clean up the balance sheets of the RBI and the government. "This would be completely consistent with the government's approach to the two balance sheets and would have a positive effect on markets," he says.
The former deputy chairman of Planning Commission Montek Singh Ahluwalia says while there are two views on the reserve issue with someone like Arvind Subramaniam saying that this can be done, the bottom line frankly is that nowhere in the world transfer of funds from central banks is treated as genuine way of modifying the fiscal deficit.
An economist from a rating agency, who refused to be quoted, said that a key question which remains unanswered is who should decide if the RBI has sufficient reserves. "Should the government decide this or should the RBI," He asks.
However, he is of the opinion that both the government and the RBI should avoid public spat over the issue as there is a report from YH Malegam Committee on the issue and they should consult him and his report to arrive at a consensus.