Opinion | Demanding Finance Secretary Garg loses out to RBI honchos

The dramatic transfer of Union Finance Secretary Subhash Chandra Garg immediately after the Parliament passed the first Budget of Nirmala Sitharaman raised a small storm on economic policies. Like several members of the finance team under Arun Jaitley, who was finance minister for five years until he opted out for health reasons, Garg too was an aggressive officer. Even as he was sent to the less powerful Ministry of Power, Garg announced he had applied for voluntary retirement. Even though government insisted transfer was routine one among 12 changes at the top, obviously Garg lost out in the traditional fight between Delhi and Mumbai. The winner seemed to be the Governor of the Reserve Bank of India (RBI) Shaktikanta Das, who himself ironically was the Economic Affairs Secretary before Garg, under Jaitley.

Das was on the government side when it had taken on preceding RBI governors Raghuram Rajan and Urjit Patel regarding economic policies including that of demonetisation. He was a strong defender of removing Rs 500 and Rs 1,000 currency notes and had helped make change in policies to get people used to the new Rs 200 and Rs 2,000 notes. Though Das wanted the government to take the surplus funds of RBI and other autonomous institutions, he wanted it to be a gradual process. But Garg, who looked at the difficulties experienced due to ballooning of government expenses due to higher outlay for security and welfare measures and the flattening of revenue collection due to introduction of GST, wanted more money, that too non-tax money. Garg thought the Rs 3 lakh crore kept as reserve by the central bank will plug the gap. But Patel and his very vocal deputy governor Viral Acharya, who quit last month, strongly opposed. Even though government agreed to a six-member committee to study and made Garg a member on it, Garg and Acharya were on a warpath.

Next, Garg thought the Securities and Exchange Board of India, which is a semi-autonomous institution managing companies and capital markets, had some surplus to give. He put pressure on the financial services division of the finance ministry to squeeze more funds out of government-owned banks and insurance companies, especially the State Bank of India and Life Insurance Corporation of India. Garg also set disinvestment target high and finally it was negotiated to a record Rs 1.05 lakh crore to be raised.

Garg, known as a disciplinarian in his career, wanted tough financial discipline by raising over several lakh crore rupees in the next five years. Garg’s argument made economic sense that a popular government must take and implement difficult decisions in the first year. But he was taking on too many big institutions under the finance ministry at the same.

The big change which he wanted was the government should raise foreign loans as it had comfortable foreign exchange reserves and interest rates were very low. This would have brought immediate money for government and freed domestic debt market for the private sector to grow. Meanwhile, he refused to agree with the Bimal Jalan Committee which said the surplus of the RBI should be given to the government in small instalments over several years. Interestingly, Das and his team in the RBI were not comfortable either with foreign debt owing to fears of volatility of foreign exchange or for bulk withdrawal of the central bank's money. But Prime Minister Narendra Modi had given green signal to Nirmala to include sovereign bonds. Once the proposal came out many economists said Indian economy could go down the way of Argentina whose government had suddenly borrowed too much foreign money and it resulted in an economic crisis.

Garg who has seen himself as an agent of change was hurt by the criticism, though the finance minister strongly defended every suggestions from the economic affairs team. After Garg's exit, it is a challenge for the ministry to stick to the strong medicine that Garg and his team had prescribed, even the accompanying words might have rubbed many shoulders the wrong way.