RBI's surplus transfer isn't a silver bullet; govt shouldn't get complacent

Finance Minister Nirmala Sitharaman’s first big economic policy announcement last Friday evening, almost a month and a half after she had presented her first Budget on July 5, has been warmly greeted by the Bombay Stock Exchange. The Sensex, its benchmark index, went up by about 800 points on Monday. Of course, hopes of a resumption in US-China trade talks also buoyed the overall stock market sentiment, but you cannot really overlook the positive impact of Ms Sitharaman’s announcement on the Sensex that rallied by over 2 per cent. 

A bigger announcement was made on Monday evening. The Reserve Bank of India issued a statement after its board meeting that it had accepted the recommendations of the Bimal Jalan Committee, which had examined the required provisions the central bank should make to meet its economic capital needs including the contingency fund, currency and gold revaluation reserves and other reserves. 

That meant the RBI could transfer about Rs 1.76 trillion to the government — of which Rs 52,637 crore would be by way of excess contingency fund provisions and Rs 1.23 trillion by way of dividend. Of the dividend amount, Rs 28,000 crore was already paid out by the RBI some months ago as an interim amount, which was shown as part of the Union government’s revenue for 2018-19. 

Thus, the actual revenue for the government in 2019-20 as a result of the RBI accepting the Jalan Committee recommendations is about Rs 1.48 trillion. The Union Budget for 2019-20 provided for a total revenue of Rs 90,000 crore from the RBI. Thus, the extra money that the Centre has now received is Rs 58,000 crore. This is just about 0.3 per cent of India’s gross domestic product or GDP. 

Nevertheless, the stock markets greeted the announcement once again on Tuesday with the Sensex scaling another 147 points. With the government’s fiscal situation getting slightly better and expectations of reduced pressure on its borrowing, the 10-year government paper’s yields also began softening.

The danger, however, is that this excitement in the markets may lull the government into wrongly believing that all the economy’s woes are over and the problems have been fixed. That would be dangerous. Neither of the moves is a sure and sustainable way of addressing the economy’s deeper problems. The measures initiated so far have their own limitations and the government would do well not to go overboard with its achievements in changing the mood in the markets and industry. 

Take the package announced for the automobile industry on Friday. The doubling of the depreciation provisions to 30 per cent will certainly encourage higher sales of commercial vehicles and passenger vehicles, as enterprises and self-employed tax payers would try to take advantage of the tax benefit on their purchase of vehicles before March 2020. Similarly, the huge inventory of vehicles gathering dust at the dealers’ end is likely to be cleared after the decision that BS-IV vehicles will be allowed to operate for the entire duration of 10-15 years of their registration period, provided they are purchased by the end of March 2020. Relaxation in the registration norms and the introduction of a scrappage policy for old vehicles will also improve the prospects of automobile sales in the country. 

But the impact of these measures will be of a relatively short duration. What happens next year to the demand for vehicles is something that will continue to bother the automobile industry and, therefore, the government. The automobile industry has a share of about 7 per cent in the country’s GDP. It accounts for almost half of the entire manufacturing sector and provides jobs to 8 million people directly and indirectly. 

There are serious doubts over the long-term demand for non-electrical vehicles in all major economies of the world. India cannot remain an exception. The impact of technology, the rise of the share economy and the behavioural shift away from buying of passenger vehicles among the younger people are all factors that would continue to keep the demand for automobiles depressed. Solving the demand problem for the automobile sector for just this year is clearly not enough. 

An equally important issue that the government has to keep in mind is the importance of quick and smooth implementation of the many measures that Ms Sitharaman announced last Friday. Announcing a package of measures is only the beginning of an exercise to repair the damage the ongoing slowdown has caused to the economy. How effective that package becomes will depend on how quickly those decisions are implemented on the ground. For instance, the well-intentioned scrappage policy for old vehicles should be finalised at the earliest. If the idea becomes a victim of conflicting views of different ministries, there will be avoidable delays and the promised recovery would become more elusive. 

The decision to quickly release Rs 70,000 crore to recapitalise public sector banks will also require careful thought and planning before it is implemented. Should the upfront recapitalisation plan use a merit-based method by which banks that are relatively healthier and have performed well in recovering their past sticky loans get a larger share in the pie? And should this package be combined with a fresh round of public sector bank consolidation? Similar caution should be exercised while implementing the scheme for one-time settlement of loans due from micro, small and medium enterprises. Settlement of dues should not be allowed to adversely affect credit discipline among borrowers. 

Finally, the government would do well to resist pressure on it to loosen the purse strings now that it will receive Rs 58,000 crore of extra funds, available as a result of the Jalan Committee’s recommendations. The dangers of a tax revenue shortfall are real. And it would be advisable to use the extra RBI money to meet the revenue shortfall, instead of using it for a stimulus.