Former Reserve Bank of India Governor Raghuram Rajan on Tuesday broke his silence on the charges levelled against the 80:20 gold scheme that was rolled out in 2013, saying that the scheme was brought in to combat the lack of gold supply and bring back jobs in the Indian jewellery sector.
Rajan said the government in 2014 was looking to relax import restrictions on gold after the rupee had recovered from 2013's taper tantrum.
The central bank then implemented the 80:20 scheme to allow importers of gold to start importing again but with certain conditions in place.
Asked about the timing of the scheme's rollout -- it was allowed during the changeover in government in May 2014 -- Rajan said the government's 80:20 proposal appeared to follow objective criteria and that its motive was clear: to give a fillip to free trading in gold and create jobs in the jewellery sector.
The former RBI governor also spoke about the recently reported Rs 13,640 crore Punjab National Bank fraud and said that the scam should have been uncovered sooner. He also said that had the RBI had any idea of what was going on at the time, it would have done everything in its power to stop it.
There is plenty of blame to go around, but it is important to first focus on why the fraud occurred and what systems were inadequate. In any such thing and I am sure the investigation will go into all these details, but why was this Letter of Undertaking (LoU) given.
Why was it not recorded in the banking system? Did management take notice of it? Was it put before the board? And of course after that did the auditors pick it up, if they didn’t why didn’t they pick it up because auditors go branch by branch and then were the regulators instructions obeyed over time or were they not and why were they not obeyed? Of course the owner in this case the government which appoints the board members as well as the management what is their culpability in this whole thing. I think every facet has to be examined.
One of the important concerns about frauds that I had when I was at the Reserve Bank of India (RBI) was that we unearth them, but we never actually brought any of the culprits to book. So, one of the things we did was we said we need to bring together all the people involved both in unearthing as well as investigating and see how we can move forward. So, we sent a list of the big frauds to the Prime Minister’s Office to try and get some action on that. So, these are the kinds of things we need to figure out.
Before we assign blame, we have to know what happened and why it happened. In many banking systems there are so many ways of getting around the system. We have to understand that when a way is discovered for example with the SWIFT system it was the problem at Bangladesh Bank which unearthed the problems that were there.
When the problem is discovered it is important that the regulators send the message to the banks that we have unearthed this problem, now fix it in your systems.
Of course after that the regulator basically assumes to some extent that the banks have fixed it. If they haven’t, we have to understand why the banks didn’t. I mean when they were told about a problem why wasn’t the problem fixed and I understand they were other reminders sent after that by the Reserve Bank and we have to understand why they weren’t obeyed. So, there is a fair amount of learning from this episode that we need to get. But surely there is plenty of responsibility to spread around.
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?
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.
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