Should the government be transferring the reserves of the Reserve Bank of India (RBI) to its account? The legislative powers of the government to lay claim on the reserves of the RBI can be the final defense of such a move. However, from the point of view of pure macro-economic governance, there are some compelling arguments against such a drawdown. This is on both the side of motivation for such a move as well as the appropriateness.
The first question relates to the purpose of this drawdown or transfer of reserves to the government. The purpose ostensibly appears to be to balance the Budget and ensure that the fiscal deficit ratio remains at the predetermined rate.
Keeping the deficit at 3.2 percent or 3.3 percent has become some kind of a sacrosanct end for the government over the years which had led to several compromises especially on capex at a time when investment is not picking up. Getting in these reserves is another way of ensuring that the deficit is maintained and capex not compromised. Using RBI reserves may not be the best way out.
If, however, the reserves are being used for some specific purpose which requires a large amount of funding, then it could probably still be defended. But, here too, there can be counterarguments.
Suppose the amount is used for recapitalising banks, will it be similar to the recap bonds where accounting entries are made but the character does not change? On the other hand, if the money is used to probably create a new infra or SME finance outfit, then it would make more sense as the money is being put to productive use. The jury is still out on whether these motivations would be acceptable from a governance standpoint.
In the past, public sector units (PSUs) have been asked to pay a higher dividend (which also benefits other shareholders) which come in the way of ploughing back the profit for investment purposes at a later date.
The RBI has also been transferring virtually the entire surplus to the government which can be running to over Rs 60,000 crore. This is now an acceptable practice and in a way has become a norm. The problem arises now when we go beyond the flows to the stock of reserves of any entity to finance the budget.
If one looks at the accounts of the RBI, it has the advantage of running a liability book which has no cost as it is the central bank. The assets earn income and hence the profit arises. Now the reserves comprise those for contingencies (Rs 2.3 lakh crore) and currency and gold valuation (Rs 6.9 lakh crore) which theoretically can be considered for transfer. As the accounts indicate, the strength of the central bank and hence of the nation, using the same for the country’s benefit is a priority justification for laying such claim to these funds.
As this has not been done before, doing it now will definitely send a signal that all is not well with the government’s finances and will hence raise several questions on the running of the Budget. In fact, global rating agencies would be watching this carefully as such transfers would not augur well for the credit rating of any country as this indicates acute fiscal strain which is a major parameter considered by them.
Ideally, the surplus of the central bank should not be used for the Budget because it leads to an anomaly in so far as that the RBI earns more revenue when it lends more to banks through, say repo operations. Hence, a prolonged liquidity issue with banks that is supported by the RBI is paradoxically good for the government as the central bank’s income increases and so do surpluses and transfers.
The idea of transferring surpluses of government agencies to the government is not new. But doing so of reserves raises interesting possibilities as it sets a precedent which can be used for more logical extrapolations.
What if the government uses the same rule to lay claim on the reserves of other PSUs? If it can be done for the RBI, the same can be done for say SBI or IOCL or ONGC. The same logic holds as these are owned by the government and as the majority shareholder can choose how these surpluses would be deployed.
In fact, the analogy can be drawn from the disinvestment concept where the government gives up stake holding up to say 51 percent. But once they reach this level, there is nothing more that can be done and the reservoir becomes dry. The same would be the case with the reserves of the RBI or PSUs which have a finite timeline before they get exhausted. Also, given that the current year’s surpluses are fully transferred to the government, the increment to reserves on this score would also diminish.
Therefore, transferring reserves of the central bank to the government should not be pursued except in case of an emergency. There is also the practical part of the story. Drawing down the reserves would also mean selling off assets to match the balance sheet. This would mean a sale of securities held, which will be destabilising for the system – especially the GSecs as it is not feasible to run down investments in forex. As it offloads securities, liquidity would also be squeezed from the market which will complicate the issue unless fresh reserves are provided in the system through injection of new currency.
A suggestion can be that before actually implementing such a scheme, the government should have a White Paper on the same open for comments so that the resources could be used in the best possible manner. Using them for balancing the budget should be eschewed.
(The writer is Chief Economist, CARE Ratings; and author of Economics of India: How to fool all people for all times)
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Updated Date: Nov 06, 2018 16:24:05 IST