Slowdown will continue, where will govt go next?

On August 26, the Reserve Bank of India (RBI) came to the rescue of the Narendra Modi government.

The central bank decided to transfer Rs 1,76,051 crore to the government. This comprises a surplus of Rs 1,23,414 crore for the year 2018-19, and Rs 52,367 crore of excess reserves lying on the books of the RBI, as defined by the Bimal Jalan committee.

The RBI makes a profit from its operations every year. The central bank largely does not pay any interest on its liabilities (primarily the money that it creates digitally, and it prints). But it earns interest on its assets, be it foreign government bonds or domestic bonds.

A portion of the RBI’s profits are set aside as reserves. The remaining amount -- the ‘surplus’ -- is handed over to the government, which accounts for it as non-tax revenue in its budget. The surplus for 2018-19 stands at Rs 1,23,414 crore. This is the highest that it has ever been.

Over the last few years, one school of thought has been that the RBI has more reserves than it requires, and hence, it should transfer the excess to the government. This idea was first put out by Arvind Subramanian in the Economic Survey of 2016-17 when he was the chief economic adviser to the ministry of finance. Subramanian’s idea was that the RBI should transfer the excess reserves to the government and the government should use the money to recapitalise public sector banks. Now, if only economists and their ideas got implemented in the way they first thought about them the world would have remembered John Maynard Keynes differently.

Economists, analysts and individuals are a divided lot on the transfer of Rs 1.76 lakh crore. Those for the decision say that the government is only claiming what belongs to it. Those against it feel that the government is raiding the RBI balance sheet.

What both the sides have forgotten to ask is, why has the government been so desperate for this money? The answer lies in the Union Budget. During 2019-20, the government hoped to earn Rs 23.2 lakh crore from its five big taxes (corporate tax, personal income tax, goods and services tax, union excise duty and customs duty). This is a jump of 20% from what was earned last year. Such a huge jump in tax collections would have been difficult even if the economy was doing well, but to project such figures in the Budget knowing that the economy is, as is clear, in the midst of a slowdown!

In the event, the gross tax collection for the period April to June 2019 jumped by just 1.4%. That should tell us clearly why the government has been desperate for RBI’s money. Moreover, usually, when the government is in trouble, it approaches the Life Insurance Corporation (LIC) for a bailout. LIC does the master’s bidding by buying the shares of the government, which no other investor will buy. That the government has gone to the RBI this time should tell us the gravity of the economic situation.

When Finance Minister Nirmala Sitharaman presented the budget in July 2019, the government had budgeted Rs 90,000 crore as non-tax revenue from the RBI. At Rs 1.76 lakh crore, the amount coming now being transferred is almost double of that.

This will ease considerable pressure on the government. If this amount hadn’t come in or if the RBI Board had decided to transfer a lower amount, the government would have been struggling for money. It would either have had to borrow more (thus pushing up interest rates) or cut down on its spending (not a good idea during a slowdown).

Things, of course, can get worse. Chances are, this slowdown might be an extended one. So, what happens if it continues through next year, as it is more than likely to. Where will the government get money from then? Will it again lean on the RBI? Like a man-eater tiger that has tasted human blood.

Also, unpopular economic decisions at the government level in India get made only when the economy is in dire straits. But with a windfall from the RBI, the government can afford to push those decisions back. Hence, terribly inefficient organisations like BSNL, MTNL and Air India will continue to operate, with the government continuing to throw good money after bad. That’ll be a huge opportunity lost.

The only possible defence of the RBI transfer is, perhaps, that the government has lived to fight another day. Otherwise, it is clearly a case of bad economics trying to make up for earlier bad economics, which is everything from demonetisation to the botched-up implementation of GST.