The Reserve Bank of India refused the Bharatiya Janata Party-led Central government’s proposal to transfer Rs 2-3 lakh crore in 2018 for pre-election expenditure for the Lok Sabha polls next year, the central bank’s former Deputy Governor Viral Acharya has claimed, reported Mint on Tuesday.

Acharya, who served as RBI’s deputy governor from 2017 to 2019, claimed that denial triggered a clash between the central bank and the government. He made the claims in a new prelude to his book, Quest for Restoring Financial Stability in India, first published in 2020.

He said that the central bank sets aside a part of its profit each year instead of distributing it all to the government. However, the RBI made “record profit transfers” to the government in three years leading up to the demonetisation exercise in 2016, reported Mint.

According the the Reserve Bank of India Act, 1934, the central bank has to pay the government its profits.

On November 8, 2016, Prime Minister Narendra Modi had announced the demonetisation exercise under which notes of denominations of Rs 500 and Rs 1,000 ceased to be legal tenders in India from midnight.

“Creative minds in the bureaucracy and the government had devised a plan to transfer substantial sums accumulated by RBI during the tenure of previous governments to the current government’s account,” he said in the prelude.

Acharya claimed that during the demonetisation year, the expense of printing new banknotes reduced the transfers made to the Centre. This, the former RBI governor alleged, resulted in the intensifying the government’s demand for funds ahead of the 2019 elections.

The former deputy governor said that the move was an attempt to ensure “back-door monetisation” of the fiscal deficit by the central bank. “Why cut populist expenditures in an election year...when the central bank balance sheet can be raided and surging fiscal deficits essentially monetised?” he asked, according to Mint.

Acharya, who had resigned six months before the scheduled end of his term, also claimed that when the RBI did not comply with the requests for the funds sought, the government had a proposal suggesting invoking Section 7 of the Reserve Bank of India Act.

The law allows the government to issue directions to the bank on matters of public interest to resolve certain issues. It had never been invoked in India’s independent history.

Acharya had first flagged the friction between the government and the RBI in a lecture in October 2018. He had warned that undermining a central bank’s independence could be “potentially catastrophic”, and said governments that do not respect it sooner or later incur the wrath of financial markets.

Two months later, Urjit Patel, who was then the RBI governor, had resigned, citing personal reasons.

In the new prelude to his book, Acharya referred to the controversy around his lecture, saying that matters of public interest should be openly debated rather than being discussed behind closed doors, reported Mint.

Acharya said that his lecture contributed to wise counsel prevailing even if people in the government were displeased. At the time, media reports had speculated about Patel’s resignation due to a rift between the Centre and the central bank became public.

He added that the government eventually sidelined most of the original proponents of the idea and established a committee led by former RBI Governor Bimal Jalan, which subsequently laid a “reasonable framework” for future transfers from the central bank’s balance sheet.