Did RBI Save Modi Govt Or Did Bimal Jalan ‘Save’ RBI?

Had Bimal Jalan not been there to put his stamp of approval, govt might have been able to suck out even more funds.

4 min read
Image of Bimal Jalan and RBI logo used for representational purposes.

Between 1997 and 2003, Bimal Jalan’s signature appeared on every currency note issued by India — because Jalan was the boss of the Reserve Bank of India (RBI), housed in Bombay’s Mint Street. Born in Rajasthan, but a native of Calcutta, where he graduated in economics from Presidency College, Jalan was – and continues to be – among India’s consummate economic policy insiders.

Policy czar in Indira Gandhi and Rajiv Gandhi’s governments from 1981 to 1988, the Central Bank governor during the post-Rao interregnum and Atal Bihari Vajpayee’s regime, and nearing 80 today, Jalan is the go-to man for any government in search of instant economic wisdom.


Why Modi Govt Ran To Bimal Jalan For a ‘Band-Aid’

It was inevitable that the Narendra Modi administration, hollowed out by economic follies, would have to run to Jalan for a ‘Band-Aid’ to patch a gunshot wound in its relations with the RBI. The shot was fired by the recently-deceased Arun Jaitley, in the second half of 2018, when he was finance minister.

Jalan must know this proverb: ‘the best deal is when the buyer and seller are both unhappy.’

Jaitley, scrounging around for funds to prop up a sinking economy, bankrupt financial system and hobbled by policy paralysis (to which he had also contributed) – hit upon the not-so-bright idea of raiding the Treasury. This would be accomplished, Jaitley’s ministry reckoned, if the government cleaned out approximately half the RBI’s currency reserves, now valued around USD 410 billion, or Rs 28.4 lakh crore.

At the time, nobody would really come clean on the extent to which the regime wanted to raid the reserve: estimates ranged from Rs 5 lakh crore to Rs 15 lakh crore. But a dead giveaway was North Block’s hisaab, leaked to journalists by Jaitley’s office. This argued that the RBI’s reserves of 28 percent of total assets, was twice the global average of 14 percent. Ergo, why not suck out half the funds? Patel, most bankers and economists disagreed with this financial quackery.

How Bimal Jalan Dodged ‘Tamasha’ & Got the Job Done

The acrimony over this dangerous idea – sucking out RBI funds weakens its ability to fight off raids on the rupee, the economy and support for a weak banking system – led to the resignation of the then-governor Urjit Patel in December last year, with three years still left on his watch. Shaktikanta Das, a degree-holder in History and serving babu in the Finance Ministry, was summoned to head RBI.

By this time, the government’s attempted ‘raid on RBI’ had become an unlikely media sensation and a gaping wound that bled dollars, as investor confidence plummeted, and smart money rushed for the exit. Between July and now, overseas investors have net-sold more than Rs 25,000 crore worth of stocks on their way out.

If Rs 53,000 crore seems like an awful lot of pocket change to hand over to a policy-blind government, thank your stars that Jalan was around to stamp his authority on the number.

But Das’ credibility as Central Bank head and comfort-giver was paper thin. Enter Bimal Jalan, our evergreen policy wonk, to head a panel to stem the flow.

Initially, the government badgered Jalan, appointed to his task on 26 December 2018, to wrap up things by 1 July. This was to be four days before new finance minister Nirmala Sitharaman’s first Budget. But Jalan saw through the silliness of this deadline. He knew global policymakers and investors would look askance if he rushed to meet a timetable tailored to New Delhi’s political tamasha. Worldwide, his recommendations would be treated as a sarkari hustle, and trashed.


So, Jalan waited more than a month and three-quarters, till Monday evening (26 August), when he finally revealed his hand. The Modi administration can take out Rs 1,76,000 crore from the RBI now. This means that the Central Bank is actually being bilked only of Rs 53,000 crore extra – it was anyway scheduled to pay the government Rs 123,000 crore as dividend.

‘The Best Deal Is When the Buyer & Seller are Both Unhappy’

If Rs 53,000 crore seems like an awful lot of pocket change to hand over to a policy-blind government, thank your stars that Jalan was around to stamp his authority on the number. Given a free hand, the raid could have sucked out cash worth 10 times or more from the Treasury.

Purists may still frown at the government picking the RBI’s pocket, the first time in history that this has happened. The Modi regime will inwardly fume that it got relatively small change instead of the dreamed-for loot. But Jalan, a Marwari reared in Calcutta, must know a proverb coined by his vast, centuries-old brethren in Burrabazaar, once the largest market east of the Suez: ‘the best deal is when the buyer and seller are both unhappy.’

(The writer is a Delhi-based senior journalist. He tweets @AbheekBarman. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)

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