RBI is the new LIC for govt to rescue economy; with Rs 1.76 trillion bonanza, it just saved Nirmala Sitharaman from a fiscal embarrassment

  • The RBI, as an institution, has lost another round in the battle with the government

  • Till Shaktikanta Das took over as the governor, the RBI had engaged in a bitter public spat with the government on various issues

  • Besides Rs 1.76 lakh crore, there is a possibility that the government may seek another interim dividend from the RBI

A stimulus package to save the sinking economy has finally come, not from the Central government but from the sacred coffers of the Reserve Bank of India (RBI). How else can one describe the late-night announcement of the central bank on Monday which said a sum of Rs 1,76,051 crore will be transferred to the government post the approval from the Bimal Jalan committee.

This amount, comprising Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF), can work wonders in two ways to save the Narendra Modi government from an embarrassing fiscal situation.

First, it would help the government stay on course of the proposed fiscal deficit road map. Going by the present Budget estimates, the government has set a fiscal deficit target of 3.3 percent of the gross domestic product (GDP) for the current fiscal, revised downward from 3.4 percent pegged in the Union Budget for 2019-20.

Achieving this target would have been virtually impossible for the government given the not-so-impressive revenue collection figures and slow progress of the disinvestment process. With this bonanza, the government can make sure it doesn’t slip.

 RBI is the new LIC for govt to rescue economy; with Rs 1.76 trillion bonanza, it just saved Nirmala Sitharaman from a fiscal embarrassment

Representational image. Reuters.

Second, if the Narendra Modi government chooses to direct this money to push up investment giving a temporary slip to the fiscal deficit numbers, then the likely beneficiary would be the infrastructure and housing segments which can, in turn, spur other economic activities.

More jobs and cash in the hands of the public will boost consumption in the next round. This will break the vicious cycle of no-investment, no-consumption and no-job the economy is facing at this juncture.

This RBI-sponsored stimulus package is also a major face-saver for Finance Minister Nirmala Sitharaman who has been caught in an extremely difficult fiscal situation.

Sitharaman’s first Union Budget was a major disappointment for those who were expecting a major stimulus package to save the economy. All that came in the Budget (resembling a stimulus) was Rs 70,000 crore capital infusion plan announced for the public sector banks (PSBs).

But, even that wasn’t significant because NPA-ridden banks would need much of that money for provisioning requirement and to meet mandatory reserve requirements, leaving perhaps around Rs 30,000 for credit off-take.

The precarious state of the economy was recently called out by the NITI Aayog chief following which Sitharaman conducted a press conference to talk up the economy. But except rolling back certain tax proposals imposed on foreign investors and startups, there weren’t any major stimulus announcement. That wasn’t a surprise though since the government’s fiscal situation didn’t allow Sitharaman to do much. The RBI’s cash transfer, in this context, will be a major relief for the finance minister.

It is worth mentioning here that the RBI, as an institution, has lost another round in the battle with the government. Till Shaktikanta Das took over as the governor, the RBI had engaged in a bitter public spat with the government on various issues.

One of the issues, of course, was the issue of capital surplus transfer to the government. In fact, this was one of the reasons why former governor Urjit Patel announced his dramatic exit from the central bank. His predecessor, Raghuram Rajan wasn’t in favor of this proposal, too. The whole scenario, however, changed after Das was appointed the governor. The RBI-government spat was buried and relations appeared to improve between the two.

Indian economy continues to be in a tough spot. Banking sector and the non-banking finance companies (NBFCs) are still in the midst of a tight liquidity situation. Auto, fast-moving consumer goods (FMCG) companies are facing the heat.

According to the global rating agency, S&P, some Indian companies with high leverage and persistent negative free cash flows would be susceptible to funding and liquidity challenges over the next 12-18 months. The growth prospects of these firms will also be impacted, it said.

"We expect the Indian corporates to grow earnings by 7-8 percent annually over the next two years, down from the double-digit growth of the past two years despite the recent stimulus announcement aimed at encouraging foreign investment, auto demand, and bank lending," said S&P Global Ratings credit analyst Krishnakumar Somasundaram.

Tapping the RBI reserves post a favourable report from the Jalan panel has opened up a new source of fiscal support for the government to rescue the economy. Besides the current Rs 1.76 lakh crore, there is a possibility that the government may seek another interim dividend from the central bank.

Till now, the government has generously used the cash surplus of Life Insurance Corporation of India (LIC) to bailout state-run companies with messed up balance sheets. To salvage the economy, the RBI has probably taken up the role of the LIC for the Narendra Modi government.

Updated Date: Aug 27, 2019 13:10:29 IST