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Demonetisation: Former RBI governor YV Reddy says objective seemed far beyond currency notes

Former Reserve Bank of India governor Yaga Venugopal Reddy. (Image: PTI)

Former Reserve Bank of India governor Yaga Venugopal Reddy has always been known for his clarity of thought and for plain speaking. A stickler for rules, Reddy, an IAS officer from the Andhra Pradesh cadre, succeeded in bringing about several reforms, despite not always being on best terms with the establishment. Ahead of the release of his autobiography, Advice and Dissent, Reddy tells FE in an interview that farm loan waivers are permissible as long as these are paid for by the state governments within the limits of FRBM. Reddy, however, questions the idea of the RBI giving the government a special dividend in lieu of unreturned old high-value notes after demonetisation. He is also against recapitalising public sector banks from the RBI’s reserves. Edited excerpts:

We hear you still love your evening tipple…
(Laughs) Yes, in fact I am waiting for it. Unless medically advised, I do. There is a delicate balance between good habits and bad habits.

Your work as an IAS officer seems to have been far more interesting than that as an RBI governor… Which role was more fulfilling?
When I started writing the book, everyone was interested to know about the inside story of my tenure at RBI. I opposed everyone and restricted governorship to 30%; so it is a story about my life. In fact, the original title of the book was “Destiny and Dharma”. In every role, I did my dharma. If I have to tell my story, then it is not through the image of deputy governor or governor.
In one incident, the Pakistani officers of a captured ship thought they would be killed. I told them, look you are our guests, your ship has been impounded. They trusted an IAS officer.

You are a stickler for rules. Once, you went on leave to avoid receiving Sanjay Gandhi in AP since he did not hold any office. You also said you would have done the same thing if faced with the prospect of implementing demonetisation…
I regret having made that statement. It was truthful, but perhaps it was not in good taste to comment on what I would have done if I were governor. The point is, the objective (of demonetisation) seemed to be far beyond than currency notes, it related to tax. So, in a way, it was the job of the tax department. Secondly, the task was such that if it was not performed up to reasonable satisfaction, there was an inherent reputational risk. It was in this context that I made the statement.

Could RBI give (say Rs 2-3 lakh crore) as special dividend to the government if some invalidated notes had not come back to the system?
It is accounting jugglery. Technically, surplus is based on the current year’s income and expenditure as the law defines it. The RBI’s balance sheet is not like a corporate balance sheet, it is the result of its objectives. The reserves on the RBI’s balance sheet are there to help it absorb shocks, it should have adequate capital to carry out its role without seeking support. But giving special dividends to government involves money creation. When the RBI transfers to its reserves, it is not creating money. But when its transfers to the government, its creating money. In essence, you are pumping back the money. But if the government feels it has a right to reserves, then there is a need for corresponding action to neutralise its possible impact on money supply.

When former finance minister P Chidambaram favoured public sector banks’ consolidation, you said there was a need for reforms in PSBs as it was more to do with with structure of governance and political economy and not the size. How do you view the current situation?
It was a fairly acceptable and objective diagnosis at the time. The diagnosis is the same today, after 15-20 years. My stand was that if you were planning consolidation in a system of so many banks… are you planning strong and strong, strong and weak or weak and weak? A decision would have to be contextual.

Do you think the RBI acted a little late on asking banks to present the value of assets? The asset quality review came only in late 2015.
Unless an analysis is made, one can’t comment. But the limited point I would make is that you have to distinguish between stock (NPA) and flow (system). If you mix up the two, there could be a problem. The third thing is the aggregate impact. The aggregate impact is trying to squeeze people to settle NPAs. One can’t choke credit for too long. I think it is a delicate balance. Secondly, if bank credit is not growing, and the weaker companies are borrowing from somewhere else. Therefore, whenever such a big issue arises, you have to look at the system. You have to keep the balance between the stock and flow, immediate compulsions of growth and overall systemic implications.

The Economic Survey floated the idea of using a part of RBI’s reserves to recapitalise public sector banks…
Reserves are there as a capital support to the RBI. If the RBI is in trouble, the government will have to recapitalise the central bank from which it took money. If at all one wants to use the RBI’s reserves, in my view, the proper way of doing this is to take the reserves into the balance sheet of the government of India and then give money to banks… If at all you have to do it, not that it is the right thing to do. But there is something odd to say, regulator’s capital should be used to recapitalise the failures of the regulated!

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You opposed the Rs 60,000-crore loan waiver in 2008 saying the government should pay from the budget. Many state government have already announced fresh batch of waivers…
The first principle that was established is that if the government wants to give farm loan waivers, it should pay the money. Secondly, it was done at an all-India scale in 2008. Now it is localised. One can say social order issue can be localised, not all over India. As long as it is within the fiscal limit of the FRBM Act, then it is a question of allocation of resources for states. There it will be philosophically difficult to oppose. As far as credit culture issue is concerned, the RBI governor can make two points — credit culture and overall impact of increased revenue deficit. As of now, no state government can exceed FRBM limit on fiscal deficits without Centre’s permission.

Why did you want to do black money as your doctorate thesis, that too in 1960? Any thought on the government’s latest drive against black money?
Let me clarify, my thesis was black market, not black money. At that point of time, there was this whole issue of controls and it was a big problem. Most of the black money at that time was through black market.