- Wealth PMS (50L+)
It’s obvious now that the lockdown will hurt India’s economy. And just as other countries are doing, we’ll need big stimulus to start pushing it back into gear. There’s a number of things that this process will involve:
This costs a ton of money. A rough estimate would be, say, Rs. 400,000 cr.
The government doesn’t have this kind of money right now, and raising it by selling assets or issuing debt is enormously difficult. Because the debt it has is already quite large, though not as much compared to the western governments nowadays. However, it doesn’t need to take more debt. There’s money the government rightfully owns which sits idle in a very specific place.
This kind of money doesn’t grow on trees, so what nonsense is this, Deepak? (I can hear you think) But bear with me, because I’ve thought this through.
The money may not grow on trees, but there’s one big mega uncle who prints it, and generates a large amount of profit. It’s called the RBI.
We have written earlier that the RBI has way too much money sitting in its balance sheet that it shouldn’t have. These are called “reserves” (very different from forex reserves). Read: The RBI is hoarding too much capital.
Essentially, these are very large numbers of retained earnings, that has gone up even more now with this crisis. The extra earnings can be given back to the government, which can then spend it.
Now, RBI makes a lot of money from multiple sources:
Okay, ignore the nitty gritties.
Simply put, RBI has a potential profit, this year, of around Rs. 200,000 cr. This is money it can remit straight to the government this year.
Well, no. The RBI is not very happy to be paying the government anything, to be honest. They keep building random “buffers” to avoid having to pay the government. See what all they have:
In total, the RBI has a Rs. 13.5 lakh crores of extra profit (retained earnings of sorts) on its balance sheet. (As of March 2020)
Every year, it generates a large profit and just keeps a good portion in each of these sub clauses, and avoids paying the government. In a partial correction, last year, they discovered that the excess on the balance sheet was too large, and paid out Rs. 1.76 lakh crores as dividend, but it still leaves a huge amount of room for more.
Yes, I’m coming to that.
The RBI’s balance sheet is Rs. 47 lakh crores.
The “equity” stuff on the balance sheet, which includes the “extra” stuff we talked about – is more than 13 lakh crores. That’s like 27% of their balance sheet.
According to the recent Bimal Jalan committee report, the RBI should have a total buffer of about 21% – around 9.8 lakh crores.
Given that they have more than 13.5 lakh crores – roughly 400,000 cr. can be given back to the government as dividend.
Oh they don’t have to sell anything. The RBI has an account for the government. (It’s the govt’s banker). So you transfer from one account (the retained earnings) to another. That’s all.
The RBI balance sheet doesn’t change – only the constituents do.
Let’s get serious. This is a massive economic blow for the country. We will easily lose over 4% of GDP just to the lack of activity for a month. This has to be made up by massive government spending.
That spending has to be financed. Already, the highest expenditure of the govt is interest payments. (Over 5 lakh crores in interest. The next highest entry, defence spending, is 40% lower!)
The government may still need to borrow but why should it borrow when the RBI, which is owned by the government, has all the bloat sitting inside it?
That’s like saying I have a lot of fixed deposits but let me go borrow money instead to pay for my urgent medical bills, even though I’m reeling under interest payments.
The country needs help. We need to relax the ridiculously huge buffers maintained by the RBI in order for the government to spend.
The RBI could pay a lot more – but this year, a 400,000 cr. payment looks very achievable without stepping on some toes.
I’m not even asking for the government to eat into RBI’s already created massive reserves. Just that they take what profit would have been generated in this one year, instead of allowing RBI to bloat what is already much larger retained profits than required. Remember, most central banks have much lower retained equity as a percentage of their balance sheet. RBI is at 27% currently. Brazil is at 1%, Russia at 13%, South Africa at 1% and the closest perhaps is Germany at 13%. India’s RBI has simply way too much in terms of retained earnings and buffers.
In the times of a crisis, you have to use buffers. This is a crisis. This is what a buffer was meant for. I know that a vast crowd will cry tears about how this undermines the independence of the RBI or some such random spiel, but this is not a time to listen to them. It’s time for us to place money in the hands of those that will shoulder the burden, and to not let it lie in forever-unused buffers like within the RBI.
Note: What about inflation, you might ask. There will be no inflation by this; none of the above will cause balance sheet expansion of the RBI. And btw, the whole world is inflating and doing so heavily. And they’re all going to support their own countries with specific packages. In that context, there is very little likelihood of any inflation – in fact we’ll have to fight deflation in a slowdown.