As governor I do bear responsibility for any actions of the RBI: Rajan
City: 

Former Reserve Bank of India governor Raghuram Rajan has revealed that the controversial 80:20 scheme, that benefited 13 ‘Star Trading Houses (STH)’ and ‘Premier Trading Houses’ had been aimed at reducing gold imports at a time that the current account deficit was “getting out of control” and to bring back jobs for workers in the industry who had been laid off because of shortage of gold.

Breaking his silence on the 80:20 scheme, which allowed the 13 STH and PTH to import gold and sell about 80 per cent of their total bullion shipment in local markets and to export the other 20, he said, there was a foreign exchange crisis in 2013 and there was a great sense that the current account deficit was getting out of control, a big part of the current account deficit was big purchases of gold as real interest rates were strongly negative.

“So, when the public was moving into gold in a big way the government thought that perhaps one stop gap arrangement – a temporary arrangement would be to reduce the imports of gold. So, it brought in this 80:20 scheme which said that out of every 100 grams that you import of gold, you have to re-export 20 gram and there are a few entities – State Trading Corporation etc and a few public sector banks that would be allowed to import,” Rajan said in an interview to a private television channel.

Below are excerpts from the interview to the TV channel.

Hot from the oven news is that the Reserve Bank has banned LoUs. News coming in just about 10 minutes back. Way to go you think?

Rajan: I can’t opine on current policy and I am sure they have looked at the issues. One of my concerns in India is that there is sometimes a very cavalier treatment of guarantees whether it is bank given guarantees or government given guarantees. We don’t think these are real and it is only when they are called upon by the entity that has relied on them that we understand that it is almost like giving a loan or in fact more than giving a loan because it usually called upon when the loan is in distressed. So, it is actually like providing equity. Unless we account for these properly there are huge contingent liabilities on the government balance sheet as well as on the bank balance sheet and it is important that we acknowledge them.

You are speaking about pushing blame around and the government has picked up this 80:20 gold scheme as one of the ways in which people were allowed to make money. What are your comments on – you must have heard what the government said about this?

Rajan: As far as I understand, the Punjab National Bank (PNB) scam started in 2011 and was unearthed in 2018. The gold scheme that is under the scanner at this point was something which lasted between May 2014 and November 2014. It seems to me very hard to argue that whatever happened then and I am happy to talk more about that, but whatever happened there was in any way related to the scam other than it happened in the same industry that there was gold involved. It is important to treat these has two separate issues. Happy to talk about the 80:20 because the actions there as far as I understand were justified, but I think it is important to keep it separate from the scam.

People conflate this all the time and I think this seems to be diversion of public interest rather than a focus on the key issues which are important. Why is it that our banking system is leaking so much? How do we prevent the leaks especially when there is so much new money going into the banking system as re-capitalisation?

This 80:20 scheme goes as liberalisation of the number of people who could import but it looks like only some people benefited. How would you answer to that charge?

Rajan: What happens with a number of issues is, the RBI is supposed to talk with the government, the government sort of is often the prime mover and the RBI is then supposed to ask whether the policy can be implemented and then announce the policy.

On the 80:20 gold scheme remember the circumstances in which it was brought about. We had a foreign exchange crisis in 2013 and there was a great sense that the current account deficit was getting out of control, a big part of the current account deficit was big purchases of gold as real interest rates were strongly negative. So, when the public was moving into gold in a big way the government thought that perhaps one stop gap arrangement – a temporary arrangement would be to reduce the imports of gold. So, it brought in this 80:20 scheme which said that out of every 100 grams that you import of gold, you have to re-export 20 gram and there are a few entities, State Trading Corporation etc and a few public sector banks that would be allowed to import. That had a very important effect in quelling the imports of gold which also meant that the pent-up demand to some extent for gold was building up because our jewellery industry was at a loss given that gold had been stopped.

At this point the commerce department started arguing that maybe we should have some liberalisation and we should open it up to more players to import gold so that there is more free flow of gold into the system.

Obviously with any liberalisation if you actually implement it, gold imports will go up, the question is who was allowed to implement? There as I understand it and again I have to collect this information at a distance – the department of trade in the commerce ministry has a criterion of who it nominates as star exporters, star trading houses, prime exporters and that objective criterion was available and as I understand it, that criterion was then used to say here are the guys who can import.

The whole objective was to bring down the premium that had built-up in the gold trading because of the constraints on supply side. So, liberalisation would have brought down that premium considerably.

Why were we able to liberalise? Because we had weathered the first part of the crisis, we had built up reserves somewhat. There was a little more confidence that things were a little better. Further the ultimate aim was this was a constraint on our industry, on industry which employs a lot of people, so the ultimate aim was to get rid of it completely. The scheme that is under controversy was run during the first few months of the NDA regime and finally it was done away with in November 2014.

Like any constraints that are imposed on a market system, there would have been some people who made money and some people who didn't. The people who didn't make money objected against the people who did make money but the people who made money were objecting against others, this kind of thing keeps going on. Ultimately the idea was to bring back free trading, that's what happened and that is a good thing.

The charge is that the circular came on May 13 when a regime change was in the offing and therefore in a sense mala fide in intent?

Rajan: I don't want to go into that. I understand this is a big issue in Parliament. The point I think is important to remember is that this is a period of rapid regulatory changes, we were dealing with foreign exchange crisis. There were a number of adhoc schemes, ad hoc arrangements and I can see that there could have been some arguments made that this new government is going to take time to understand, maybe we need to bring it in, I don't know what the rationale was behind the government at that time. However the point from our perspective at RBI was to understand whether there was any objective criteria for doing what was being done, the logic being that we had weathered the foreign exchange crisis, that in fact there were constant representations from the gold industry that there was a shortage of gold and to some extent there was pent-up demand which was potentially creating other problems. So, our job was to see is this done in a reasonable way. I have not been able to go back to the circulars that were issued and the underlying discussions.

What happens in this case is, the department takes care of it and talks to the government and issues them but as governor I do bear responsibility for any actions of the RBI.