Reformation of Economy

by August 28, 2019 0 comments

The critics of the Government are screaming murder at the RBI’s special dividend. They shouldn’t in such a crisis

The Reserve Bank of India (RBI) has been quietly stashing away funds for a rainy day, and despite the costs of printing new notes and the headaches of demonetisation, they are not a problem for it. So why is so much noise being made about the fact that the RBI is paying the government a special dividend of Rs 1.76 lakh crore? Maybe it is because of the sum itself, which sounds familiar being the same number that the Comptroller and Auditor General (CAG) alleged had been lost in the 2G scam. Or as the opposition Congress pointed out, the figure is almost the exact same amount missing from the Budget 2019 announcement. But the big affront, according to some economists and experts, is that this presents a clear and present danger to the autonomy of the RBI, which seems to be kowtowing to the government after the exits of two high profile Governors, Raghuram Rajan and Urjit Patel, over such lendings. Would this set a wrongful precedent, even dent the bank’s credit ratings?

A few things have to be made clear now. First, the RBI, while independent,  has always been in lockstep with the government of the day. More importantly, the money being stashed away by it in case of a sudden foreign-exchange or related crisis, is unlikely to happen now. But there is a criticality in public sector banks and they desperately need to be recapitalised, a stimulus of sorts has to be given to the industry, certain public sector units have to be eased out of a debt crisis before being privatised and social sector programmes need to be funded. Usually such schemes occur from your taxes but with individuals cribbing about high income tax and GST rates hitting consumption, there is little or no scope of generating additional revenues from them. In such circumstances, the RBI’s rainy day fund is not just a piggy bank being raided, it is being used for exactly the purpose it was designed for, helping the government cope with an economic crisis. Of course, a logical question that follows when a government is flush with funds is whether an income tax cut might follow. Logically, one should follow, but with spending priorities such as bank capitalisation and even a partial bailout of Air India ahead of income tax relief, that is unlikely. However the current infusion will allow the government to clear its debts and pay the refunds it owes. That will be a big boost to the economy and increased funds might mean that some industries could have GST rates cut, helping spur demand and allowing money to enter the economy, albeit indirectly. In addition to the announcements made by the Finance Minister, this could be the boost that the Indian economy needs ahead of the festive season. Many of the problems with the economy right now stem from the cycle of negativity that is driving sentiment lower and lower. That seems to have been broken but it might still take a few months for the effects to come through. Global rating agency S&P predicts that 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. So we need the big push than a heave. Simultaneously, we must build on fundamentals, reform structures and not depend on such bailouts going forward.

Courtesy: The Pioneer

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