RBI plays White Knight to revenue strapped government

Shakti Das RBI Gov

The Reserve Bank’s decision to transfer Rs 1.76 trillion to the government as surplus follows the “golden mean” principle, often used by committees.

This bonanza comes courtesy an “Expert Committee to Review the Extant Economic Capital” of the RBI, constituted in November 2018, which has now recommended a higher level of transfer as against the transfer in 2018-19 of just Rs 400 billion, plus another Rs 280 billion transferred in February 2019, just before the general election, as interim dividend.

Subhash Chandra Garg , the previous Finance Secretary, a lonely crusader to prise open the RBI cache

The government should thank Subhash Chandra Garg, then finance secretary, for this bonanza. Mr Garg, as one of the members of the RBI committee, dug in his heels and preferred to resign from the committee and face a transfer, rather than agree to anything less than a transfer of Rs 3 trillion — an unusually risky, maximalist stance for a career bureaucrat without any political backup.

Subhash Chandra Garg

He was a lonely crusader. Two previous Governors of the RBI – YV Reddy and D. Subbarao, went public opposing the raid on the RBI cache.  In the Committee Mr Garg was up against two former secretary level  government economists and former RBI brass —former governor Bimal Jalan and former deputy governor Rakesh Mohan – the chair and vice-chair of the committee respectively and one serving RBI brass — deputy governor N.S. Vishwanathan. Other members are also members of the RBI Governing Board – industry nominee Bharat Doshi, a long-time senior executive of Mahindra and Mahindra from the Keshub Mahindra days, and a former IAS officer, ex-Gujarat chief secretary Sudhir Mankad.

Sadly, Mr Garg exited both the committee and his position as finance secretary, while the committee speedily submitted a “golden mean” of a recommendation. It devised a suitable formula to transfer a “surplus” equal to the average of Rs 680 billion — the amount the government got last year and

Mr Garg’s insistence for a transfer of Rs 3 trillion (less Rs 280 billion interim dividend already paid in February 2019) this year. Do the maths. It’s exactly Rs 1.7 trillion.

The committee also recommended changes for calculating risk equity, called for a ban on interim dividends, alignment of the fiscal years of the RBI and the government and prescribed a band for maintaining the Contingency Risk Buffer (CRB) between a low of 5.5 and a high of 6.5 per cent of the RBI balance sheet. It noted that as of June 30, 2018, the CRB level was just 2.4 per cent and the target CRB level just 3.7 per cent, as against its significantly stiffer provisioning norms.

What the committee conveniently ignored was that as of June 30, 2019 the CRB level had already increased to 6.8 per cent — see the RBI Press Note of August 26, 2019. So even the committee’s normative maximum target was lower than the actual level. It further delegated determination of the appropriate level within the band, to the RBI’s governing board. This august body decided that the lowest recommended level of 5.5 per cent would be sufficient.

Consequently, this year, the government will receive the entire net income of RBI for FY 2018-19 of Rs 1.23 trillion plus Rs 0.54 trillion being the excess provision in the CRB, net of the interim dividend already transferred to the government last year of Rs 0.28 trillion, which works out to Rs 1.49 trillion.

Bonanza alleviates some of the likely stress from overestimated revenue receipts in this fiscal’s budget

What does this bonanza mean for the government’s finances? The existing Budget provision for dividends/surplus from the RBI, nationalised banks and financial institutions is Rs 1.06 trillion — 43 per cent higher than last year’s receipts of Rs 740 billion. But the final receipts this year will be even higher because RBI alone is transferring Rs 1.49 trillion this year as against Rs 680 billion last year — an increase of 119 per cent.

“Reserving” the bonanza for specific purposes

Where is this net increase going to be used? Money is fungible, so it can be used anywhere. Many want it used to improve bank balance sheets — the mother lodes for growth. But Rs 700 billion is already available in the Budget for this, which is being disbursed. Also, banks benefit from the 1.1 percentage point fall in the repo rate since December 2018, which is not fully passed on to consumers.

More compelling beneficiaries are two areas where the Budget provisions are unrealistic. First, revenue receipts are budgeted assuming a 20.2 per cent increase over the actual receipts of Rs 13.3 trillion in the previous year FY 2018-19. Nominal growth this year is unlikely to average more than 9.5 per cent (6 per cent real growth, plus 3.5 per cent inflation). This forecast assumes that the dipping trend in Q1 real growth, which bottomed out at 5.5 per cent in June will likely be extended into Q2 (July-September).

At the assumed tax buoyancy of 1.20 (an increase of 1.2 per cent in tax revenue for every additional one per cent of growth), tax receipts can grow at 11.4 per cent to Rs 14.7 trillion. This is Rs 1.8 trillion short of the budgeted target.

Second, disinvestment proceeds might fall short of the Rs 1 trillion target by around Rs 200 billion in a choppy stock market.

However, it is encouraging that the government was cautious with revenue expenditure during Q1, with disbursements at 26.9 per cent of the Budget lower than the 29 per cent achieved in the previous year.

The net shortfall in revenue of Rs 1.21 trillion, or 0.6 per cent of GDP, can be further reduced to Rs 0.7 trillion, or 0.4 per cent of GDP, by reducing revenue expenditure (other than interest payments and capital grants, the latter being growth kickers) by an additional 3.2 per cent, or Rs 500 billion.

Sticking to the N K Singh Committee’s glide path for Fiscal Deficit

FD Glide Path

Our budgetary fiscal deficit (FD) target this year of 3.3 per cent of GDP will come under stress because nominal GDP will be three per cent lower than budgeted, costing us around Rs 200 billion as fiscal space.  The FD target of 2.85 per cent of GDP for FY 2019-20 suggested by the N.K. Singh committee in 2017 is unreachable this year. The optimum level of FD at 2.5 per cent was targeted for FY 2022-23. But this committee had also suggested a relaxation of up to 0.5 percentage points in the FD target during any one year to accommodate shocks. Using this “out”  the Committee’s suggested “glide path” target for this fiscal becomes 3.35 per cent .

This is fairly close to what can be achieved – an FD level of 3.6 per cent, by pruning low priority revenue expenditure. We shouldn’t let the RBI largesse go waste, especially when the oil and rain gods are favouring us.

Adapted from the authors Opinion piece in the Asian Age August 30, 2019 https://www.asianage.com/opinion/columnists/310819/rbi-plays-white-knight-to-cash-strapped-govt.html


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