The Reserve Bank of India (RBI) announcement to transfer Rs 1,76,051 crore from its reserves should help the Union Government’s fiscal math look something more achievable.
The Government which has been struggling on the fiscal front, especially after even the NITI Aayog vice-chairman Rajiv Kumar recently admitted that there was an `unprecedented issue’ of a bad liquidity situation and there was also weak private investment, calling for `out of ordinary’ steps by the Government.
The Union Government had been eyeing a share of the massive Rs 29 billion reserves with the central bank. Much before the Lok Sabha elections, it argued that the reserves should not be left idle but used for ‘general welfare’.
Finally, it came with the apex bank deciding to transfer this huge amount which is roughly about Rs 500 billion more than in dividends.
Despite this transfer, the RBI remains healthy with a total capitalisation of 23 per cent of the balance sheet. However, this leaves the bank with lesser space for joggling.
The Government’s laying its hands on a share of RBI’s coffers to meet its fiscal deficit may not be sound economics and explains why some argue that it is robbing the RBI. But what is relieving is that the RBI has kept its revaluation reserves out of Government reach. Equally heartening is that a good part of the RBI contingency fund has been transferred in the current fiscal and may not be repeated next year. But surprisingly, what was expected to be a staggered payment has been made in one go.
The reserves of the RBI are in currency and gold revaluation account (CGRA), investment revaluation account, asset development fund (ADF) and contingency fund (CF). The first, CGRA accounts for the chunk of the reserves and was said to be around Rs 6.91 lakh crore in 2017-18.
The contingency fund is said to be nearly a quarter of the reserves and is set aside to meet unexpected contingencies from exchange rate operations and monetary policy decisions. The IRA includes foreign and rupee securities and the one for asset development is mainly to meet internal capital expenditure and make investments in subsidiaries and associated institutions.
The excess dividends should come to 22-31bps of the GDP and this could be used to bridge a possible shortfall in tax revenues growth. The decline in growth of tax revenues could be to the extent of 17 per cent from a budgeted 20 per cent year-on-year, assess market experts.
This makes the figures look more achievable after the transfer.
It remains to be seen how the government would use this transferred fund. In case it allocates it for higher spending, it could be for infrastructure and not consumption, is an assessment. This would lend short-term support to the markets. But there is also the likelihood that the fund might be used to meet revenue shortfall as also recapitalise PSU banks.