RBI Bonanza: Grapes gone sour for Rahul Gandhi?

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Reserve Bank of India. (Representational picture)

RBI’s Rs 1.76 lakh crore could have been any government’s gain that won the Lok Sabha elections in May 2019. Even the Congress with Rahul Gandhi on PM’s chair would have enjoyed this windfall.  

The last couple of days have witnessed high-pitched debates in the television channel studios over Reserve Bank of India’s (RBI) decision to transfer a whopping sum of Rs 1.76 lakh crore to the government—the highest ever.

Many analysts and economists have joined the chorus along with the opposition parties in vehemently criticising this move by the RBI, calling it a “band-aid” economic syndrome. Several of these experts have also written lengthy pieces on this fund transfer. All of this was expected.  

Now let’s understand the sequence of events. In December last year, a six-member committee was formed under former RBI governor Bimal Jalan to decide on the central bank’s economic capital framework. A huge controversy erupted when the Narendra Modi government in its first term sought a larger sum from RBI’s reserves to battle the economic slowdown.

Former RBI Governor Urjit Patel and his deputy Viral Acharya vehemently opposed this move underlining that this would weaken the autonomy of the central bank. Patel stepped down in December and Acharya too followed suit, though much later.

Now, many have missed one basic point—the fact that Lok Sabha polls were held during April and May 2019. And going by early trends and mood of the nation particularly in January-February before the Pulwama terror attack, which killed over 40 Central Reserve Police Force (CRPF) personnel, many pundits had predicted that the Congress would return to power, albeit with coalition partners.

Interestingly, Rahul Gandhi, Congress leader and former president of the party announced a minimum income guarantee scheme or the Nyuntam Aay Yojana (NYAY) for each and every poor family in this country at an estimated annual cost of Rs 72,000 crore and if implemented this would have translated into a total cost of about Rs 3.6 lakh crore annually. Where would have this money come from? Gandhi did not give any definite roadmap but promised that he had the math in place. One cannot help but wonder whether his math included the windfall from RBI. Grapes are often sour, aren’t they?

Hypothetically speaking, if Gandhi had come to power would he have refused this bonanza from the RBI? Well, while he made several promises in his poll manifesto, nowhere was it mentioned that he abhorred the idea of dipping into RBI surpluses. Or even if there was a Third Front Government—non BJP, non-Congress government at the centre, would it have refused this money, at the time when the economy is grappling with several problems.

However, one must also keep in mind that dipping into RBI reserves is an exception. And this is a one-time payment. All eyes will be on the Narendra Modi government, particularly on finance minister Nirmala Sitharaman to utilise this bonanza judiciously by bringing in structural reforms, which will lay a solid platform for sustainable growth.

An objective analysis of the Indian economy reveals that even as global uncertainties are on the rise, much of the country’s economic crisis is also due to government’s own mismanagement and the demonetisation exercise followed by the hurried implementation of the goods and services tax (GST).

Sitharaman must understand the criticality of the situation. With this shot in the arm, many of her budget announcements including setting a stiff fiscal deficit target of 3.3% will be met without much worry.

We hope that the capital is used to revive a few sectors which need immediate attention. Capital investment will be critical. Recapitalisation of banks—many are still reeling under the non- performing asset (NPA) pressure — should also be on the agenda.

Of the total amount of Rs 1.76 lakh crore that the RBI will transfer, Rs 1.23 lakh crore makes for dividend and Rs 52,640 crore from its surplus capital. Now an interim dividend of Rs 28,000 crore has already been paid to the government in February.

The RBI has total reserves of about Rs 10 lakh crore, which is a buffer of about 28% of gross assets that is held by the central bank. This is well above the global norm of around 14%. The RBI is one of the highly capitalised central banks in the world.

It was the former Chief Economic Adviser Arvind Subramanian, who had recommended transfer of a larger share of the RBI’s excess capital to the government.

“There is no particular reason why this extra capital should be kept with the RBI. Even at current levels, the RBI is already exceptionally highly capitalised,” the Economic Survey for FY17 had said.

All eyes will now be on Sitharaman. How she decides to spend this Rs 1.76 lakh crore will determine the fate of our economy and also of India.

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