In apparent signs of unease in the economic policy establishment at the Centre, the top bureaucrat in the Finance Ministry has sought voluntary retirement from service, a day after he was moved to the Power Ministry in a broader reshuffle just three weeks after the presentation of the Union Budget.
Outgoing Finance Secretary Subhash Chandra Garg was seen as a powerful bureaucrat, a key driver of decision-making in the Ministry and one of the architects of the controversial Budget proposal to issue sovereign bonds in foreign currency in overseas markets, which was opposed by influential sections of the government.
Garg is seen as behind the Centre’s proposal mandating the Securities and Exchange Board of India (SEBI) to share 75 per cent of its surplus funds with the Union government. He had also played a pivotal role in seeking a review of the Reserve Bank of India’s economic capital framework to get access to the regulator’s reserves — areas where the Finance Ministry and the regulators have seen major differences.
In a bureaucratic reshuffle by the Appointments Committee of Cabinet Wednesday, the government moved Garg to the Power Ministry, appointing Gujarat-cadre officer Atanu Chakraborty at the helm of the Department of Economic Affairs in his place.
High-profile exit puts question mark on Budget plans
A top Finance Ministry bureaucrat being moved out and seeking voluntary retirement puts a question mark on key announcements in the Union Budget 2019-20 including the planned overseas bonds. It has injected fresh uncertainty in the bond, currency and equity markets, which have generally responded adversely since the Budget this month. To calm the waters is the Govt’s first test.
On Thursday, Garg said he has applied for voluntary retirement from IAS, more than a year before his scheduled retirement in October 2020 — it’s the first such move by a top bureaucrat in the present government. Prior to this, former CBI Director Alok Verma, who had refused to take charge as Director General, Fire Services, Civil Defence and Home Guards, a day after he was removed as CBI Director, had told the government that he “may be deemed as superannuated” with immediate effect.
“Handed over charge of Economic Affairs today. Learnt so much in the Finance Ministry and Economic Affairs Dept. Will take charge in Power Ministry tomorrow. Have also applied for Voluntary Retirement from the IAS with effect from 31st October. Last tweet from this handle,” Garg said Thursday in a tweet from the handle of Secretary, Department of Economic Affairs.
When The Indian Express asked Garg why he was seeking voluntary retirement, he said: “No comments”.
For the Modi government, which has cultivated the image of a “fiscal hawk”, Garg ensured adherence to the path of fiscal consolidation despite demands for stimulus amid fall in growth. But his approach often resulted in friction with regulators as well as disagreements with power centres within the government, including the Prime Minister’s Office, on the fiscal targets versus growth debate.
While Budget 2019-20 presented by new Finance Minister Nirmala Sitharamanreinforced North Block’s resolve to not overstep fiscal targets, its proposal to raise funds abroad came in for criticism from former RBI Governors and economists. The plan to raise $10 billion in foreign currency in the second half of the year could itself be up for review, officials said.
On Thursday, yields on government bonds rose as much as 12 basis points to close at 6.51 per cent. Since India gives considerable access to foreign investors in local bond markets, the government tapping funds globally in foreign currency exposes the Exchequer to currency fluctuations that can jeopardise macroeconomic stability.
In the middle of last year, the Department of Economic Affairs under Garg started internal discussions with the RBI over the latter’s economic capital framework and assessed that the central bank has around Rs 3.6 lakh crore of excess capital that can be shared with the Centre.
This debate snowballed into a major controversy when the then RBI Deputy Governor Viral Acharya warned the government last October against the pitfalls of raiding a central bank’s reserves. He argued that “governments that do not respect their central bank’s independence sooner or later incur the wrath of financial markets”.
Garg responded to Acharya’s remarks on Twitter: “Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?”
The disagreement stretched as the government found the then RBI Governor Urjit Patel not relenting on many of its suggestions, such as a discussion on capital reserves, pulling some public banks out of the Prompt Corrective Action (PCA) framework and providing a specific liquidity window for the Non Banking Financial Companies.
The Finance Ministry had then involved a provision under Section 7 of the RBI Act — a power that was never used since Independence — to direct the RBI to start consultations. Patel’s resignation later on health grounds and the appointment of Shaktikanta Das as RBI Governor helped build some bridges with the RBI.
However, two key proposals in Budget 2019-20 and Garg’s dissent as a government nominee member on the Committee tasked to review RBI’s economic capital framework created fresh disquiet.
The committee headed by former RBI Governor Bimal Jalan is understood to have recommended only a nominal transfer of RBI reserves to the Centre over a period of 3-5 years. The panel also suggested that the government should not touch RBI’s revaluation reserves, mostly in the form of unrealised gains, that are built over the years. Garg had disagreed with the Committee members on these issues.
Markets regulator SEBI, too, protested against the Budget proposal requiring the regulator to share minimum 75 per cent of its surplus funds with the government — a move seen as having Garg’s imprint.
Apart from matters directly under the department that Garg headed, the surcharge on income tax of super rich has been received adversely by financial markets and investors. Benchmark stock index NIFTY has fallen more than 6 per cent since the presentation of the Budget on July 5.