Rajan said the current process of giving dividends to the government is very arbitrary in nature.
Commenting on the tussle between the Centre and the Reserve Bank of India (RBI), Raghuram Rajan said that there needs to be a scientific process to evaluate how much capital the central bank needs.
Speaking to CNBC-TV18 at the World Economic Forum in Davos 2019, Rajan said the current process of giving dividends to the government is very arbitrary in nature. Instead of negotiating the dividend every year during the time of Budget, there should be a process.
"The RBI has no call to keep anything over and above what it needs to maintain its balance sheet strength. The magic question is what that number should be. To calculate that we need an objective process. We had a team within the RBI which did calculations and prepared a structure and it was state-of-the-art. We had a discussion about this with the government then, it was approved by the board at that time, but we were never able to conclude it," he said.
Rajan added that the committee which has been appointed to evaluate this issue will think about this very carefully. "They will consider what is the level the RBI needs and how it must be paid out, which is a big accounting issue. They will also consider how to pay out without monetizing a large part which you cannot afford to, given the liquidity concerns in the economy."
On the upcoming Budget, Rajan said it will be more expansionary than the ones we have seen so far, as this is an election year. "There is talk of some special agricultural package. My worry is that as the CAG reported, there is a lot of balance sheet borrowing. We have to take into account the liabilities with health programmes or this possible agricultural scheme. Can the government afford them, not just this year, but when they roll out fully? Depending on the state of the economy, they may or may not be affordable."
