Windfall from RBI to give government ammunition to fight slowdown

A record windfall from RBI under Goverr Shaktikanta Das to tune of Rs 1.76 lakh crore -- higher than aggregate dividend paid out by central bank in previous three years -- will give Modi government ammunition to fight an ever-widening slowdown in ecomy by spurring investment and giving sectoral stimulus. Given expected revenue shortfall in a slowing ecomy especially against aggressive targets set by Finance Minister Nirmala Sitharaman's maiden Budget presented last month, windfall from RBI may be used to trim borrowing, help fund Rs 3.3 lakh crore capex plan, capitalize banks and provide fiscal stimulus to some stressed sectors, experts and ecomists said.

While finance ministry seeking higher payouts from RBI was said to be one of reasons that led to Urjit Patel's abrupt quitting as Goverr in December last year, Das-led RBI board has transferred sums that is said to be far more than stimulus pumped by some G20 nations into ir ecomies during dece-old global financial crisis. This comes at a time when ecomic growth rate has slumped to a five-year low after accelerating in first few years of Modi 1.0 regime.

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Consumer spending has slowed, private investment hit a bump, auto sector is facing worst crisis in two deces leing to tens of thousands of job losses, real estate sector has seen piling of unsold inventories and fast-moving consumers goods (FMCG) companies have seen a decline in volume growth. While finance ministry has so far t detailed blueprint of using surplus from RBI, experts said transfer especially excess reserve of over Rs 50,000 crore could be utilised for capital formation by investing in infrastructure building or enhancing lending capacity of banks by recapitalising m. 

"If government chooses to convert transferred sum into higher spending, we believe it would tilt more in favour of infrastructure spending rar than consumption," Emkay, a broker, said in a research report. Overall, this event should support markets in short term due to ditional support from RBI to government, it said. According to BofA Merrill Lynch Global Research report, it will likely be used to recapitalize PSU banks by Rs 70,000 crore, as anunced by Sitharaman on Friday with balance transferred to fisc as alrey budgeted.

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"This, in turn, should help reduce lending rates. Excessive fiscalisation would cut down RBI OMO," it said. Echoing similar views, Ashvin Parekh visory Services managing partner Ashvin Parekh said unprecedented transfer from RBI in given ecomic scenario would help government in stimulating ecomy.  money could be used for immediate recapitalisation of banks so that y get eugh heroom for expanding credit. 

Increase in credit will have a multiplier effect on ecomy as it touches many sectors, he said.  government could also decide to utilise this fund for capital expenditure by building infrastructure projects, he said, ding, projects which are stalled for want of small funds could get a boost if government uses this money. RBI board on Monday accepted recommendations of Bimal Jalan committee and has decided to transfer Rs 1,76,051 crore to government. amount consists of Rs 1,23,414 crore as surplus or dividend for 2018-19 and ar Rs 52,637 crore from its surplus capital.

Out of this total sum, Rs 28,000 crore has alrey been paid as an interim dividend and has been accounted for by budget in previous financial year.  net liquidity injection from RBI as a result of this exercise will amount to Rs 1,48,051 crore against Rs 90,000 crore estimation provided in Sitharaman's budget for 2019-20. In 2017-18, Rs 40,659 crore was transferred in dividend to government. During year (2016-17) of demonetisation, RBI h transferred Rs 30,659 crore, less than half of Rs 65,876 crore it h paid in 2015-16.

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At time of preparation of Budget, Bimal Jalan panel h t finalised report, a finance ministry official said, ding, so government h idea of quantum of fund it would get in current fiscal from excess reserve of RBI. Bank of Baroda chief ecomist Sameer Narang said RBI transfer will help government meet its 2019-20 capex target of Rs 3.38 lakh crore. Consequently, given inclination of government towards fiscal consolidation, ditional funds are likely to be utilised to cover possible shortfall in receipts, and meet fiscal deficit target of 3.3 per cent of GDP for current fiscal, J M Financial Institutional Securities said in a report.

"Neverless, a mild stimulus to revive slowing ecomy cant be ruled out. shortfall in receipts in latter scenario is likely to be sorted out through off-budget accounting of food subsidy, similar to last three years," it said.  talk of excess reserve has been recked by many in past. Former Chief Ecomic viser Arvind Subramanian h in Ecomic Survey 2016-17 said RBI was alrey exceptionally highly capitalised and nearly Rs 4 lakh crore of its capital transfer to government can be used for recapitalising banks and/or recapitalising a Public Sector Asset Rehabilitation ncy. However, this could t see light of day.

After Patel quit, government quickly formed a panel under Jalan to review ecomic capital framework (ECF) for Reserve Bank. During tussle with Patel, n RBI deputy goverr Viral Acharya citing Argentina's case h in October last year said undermining central bank's independence is potentially catastrophic, a "self-goal" of sorts, as it can trigger a crisis of confidence in capital markets that are tapped by governments (and ors in ecomy) to run ir finances. Earlier this month, former RBI Goverr D Subbarao warned that raiding reserves of central bank only illustrates "desperation" of a government.

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