The transfer of a top bureaucrat in India’s finance ministry and his subsequent resignation has raised many questions about the state of the economy. The bureaucrat, Subhash Chandra Garg, was transferred from his position as finance secretary and economic affairs secretary to take over as power secretary. While there is no difference in pay and perks between the positions, the move is widely seen as a major demotion for Garg.

Soon after the announcement, Garg tweeted, “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 with effect from 31st October.”

He took over as department of economic affairs secretary in 2017 and is believed to be the architect of the budget proposal to raise US$10 billion by selling sovereign bonds overseas for the first time in India’s history, something which was not done even when the country had faced a severe balance of payments crisis in 1991.

In the budget announced earlier this month, Finance Minister Nirmala Sitharaman put forth the government’s plan to raise funds via the overseas issue of sovereign bonds. The minister has cited India’s low external debt to GDP ratio as a conducive condition for the move. However, a slew of economists and former central bank governors had warned against such a move.

The plan to sell bonds overseas was put forth as India faces shrinking options to raise funds as a slowing economy has affected tax revenues. The economic survey ahead of the union budget had stated that the gross tax to GDP ratio declined to 10.9% in 2018-19 as indirect tax revenues fell short of budget estimates by about 16%, due to a shortfall in Goods and Services Tax collection – which was much below the figure projected at the start of the fiscal year.

The move to sell bonds overseas had faced severe criticism from several experts, including former Reserve Bank of India governors Raghuram Rajan and C. Rangarajan. Rajan said the plan had no real benefit and was loaded with risks. In the past India issued government bonds in rupees. It borrowed in foreign exchange only from official lenders like the World Bank.

The proposal was also slammed by the Swadeshi Jagran Manch, a think tank close to the ruling Bharatiya Janata Party. And in a new development, the Prime Minister’s Office has asked the finance ministry to reassess the idea by seeking wider consultation from stakeholders. This means that the plan has been shelved for the time being.

Garg was also seen as a key source of the recent friction between the Ministry and regulators such as the Reserve Bank of India and the stock market regulator Securities and Exchange Board of India.

As part of the Bimal Jalan Committee that is looking into the size of the reserve India’s central bank should hold, Garg had issued a dissenting note. While most members had suggested transfer of a portion of Reserve Bank of India’s reserves to the government in tranches over three to five years, Garg had favored a one-time transfer.

Garg was reportedly instrumental in denying SEBI’s repeated pleas against transferring 75% of its reserves to the government. The Finance Bill 2019 was passed in both Houses of Parliament without the government changing this provision.

Earlier he also got into a public scrap with the then deputy governor of the Reserve Bank of India, Viral Acharya. For months Acharya had opposed any transfer of the Bank’s strategic reserves to the government. He was also backed by the then governor, Urjit Patel.

In December last year, Patel resigned before his term ended, since he was opposed to the proposed transfer of funds. Acharya also resigned a few weeks ago, a few months before his tenure came to an end. The tension between the central bank and the government was unprecedented, and Garg was right in the center of the controversy then.

A few days earlier Rathin Roy, member of the Economic Advisory Council to the Prime Minister, had said India was staring at a silent fiscal crisis, and the government should release a white paper on its medium-term targets in the backdrop of a shortfall in tax revenue targets. Roy, who is also the director of the National Institute of Public Finance and Policy, had also said the government should not issue foreign sovereign debt without getting into larger public consultations.

The International Monetary Fund has also recently cut its annual growth forecast for India, as it expects weaker domestic demand to limit an economic recovery. The economy is now expected to expand 7% in the year ending March 31, 2020, 0.3 percentage point slower than IMF’s April projection. In April also the Fund had cut India’s growth outlook by 0.2 percentage point to 7.3%.

Garg’s virtual demotion reveals the many schisms within the Modi government as the economic crisis expands. All macroeconomic indicators clearly show that the projections made by the government in its latest annual budget are not based on reality. Other developments also indicate that millions are staring at job losses as the economy shrinks further.