With a word of advice for the government, Viral Acharya leaves RBI

Reserve Bank of India (RBI) Deputy Governor Viral Acharya left the central bank on Tuesday after a customary farewell hosted by Governor Shaktikanta Das. Just just last week, the feisty deputy governor had a cautionary word or two for the government’s borrowing binge.

In a speech delivered last week in IIM Ahmedabad and IIT Mumbai, the deputy governor rued that the heavy government borrowing is crowding out private players, but not necessarily for productive purposes. It is important that the government sticks to the discipline set by the Fiscal Responsibility and Budgetary Management Act (FRBM), which says that fiscal deficit should be contained at 3 per cent of the gross domestic product (GDP). It is important to reduce the “ease with which goalposts are shifted to future,” the deputy governor said. 

A variation of this speech was delivered in November 2018 at Federal Bank, but the updated speech had more. 

The government’s share of capital expenditures “currently stands at a meagre 14 per cent for India,” Acharya said in his speech. 

“Serious rationalisation could be undertaken in the form of cutting back on subsidies and programmes that are not delivering long-run growth, and instead, focusing on the provision of public goods such as education, health and infrastructure,” the deputy governor, who now returns to his academic career as C V Starr Professor of Economics at the Department of Finance in New York University’s Stern School of Business, said. 

The government can also reduce its borrowings in the market by divesting more of its public sector enterprise shares. “There could be efficiency gains, if there are more private investors playing an effective role in the governance of public sector enterprises,” which would reduce the need for market borrowings by the government and that way reduce the crowding-out. 

“It would enhance productivity, raise net government dividends and facilitate a greater balanced budget compared to outcomes under high government borrowings.” 

The government must adopt the recommendation of the Fourteenth Finance Commission and the FRBM Review Committee (2016-17) to establish an independent “fiscal council”. The council could monitor the government’s performance on “sticking to the fiscal targets and road map by assessing regularly the progress in fiscal consolidation or lack thereof, and providing standardised reports on the displacement of fiscal deficits into off-balance sheet borrowings.” 

Acharya also favoured the continued emphasis on efficient rollouts of important structural reforms such as the time-bound resolution of non-performing assets under the Insolvency and Bankruptcy Code (IBC) and the creation of national markets via the Goods and Services Tax (GST). 

“The much-needed land, labour and agricultural reforms could be undertaken, all of which can help in private sector growth,” Acharya said. 

Acharya, perhaps best known now in India for his October 2018 statement warning the government of consequences in playing with the central bank autonomy, will leave a vacuum hard to fill, especially at a time when the central bank is bracing up for its reserves transfer to the government. The outspoken deputy governor, in the past, had termed it “raiding the central bank balance sheet”. 

Acharya’s three-year term at the RBI was to end on January 23, 2020, but he decided to leave seven months early.