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Govt-RBI tussle over use of huge reserves?

That India's finances are weak is a reality that is giving the jitters to the Modi government, with the general election now just months away.

Finally, it seems, it’s all about money! This may sound blasé, but it’s a fact which best describes the ongoing spat between the Reserve Bank of India and the Narendra Modi government. The RBI has assiduously built up its reserves upto an enviable Rs 24,93,000 crores, and the government, which has squandered its money just as it has frittered away its enormous goodwill, is now eyeing the RBI’s reserves through a higher dividend. The RBI, under the Reserve Bank of India Act 1934, has to pay the government its surplus after making provisions for bad and doubtful debts, depreciation in assets and contribution to the staff and superannuation fund, among other things. Accordingly, it paid a dividend of '30,659 crores, which is around 63 per cent higher than what it had paid for the July 2016-June 2017 financial year. In August, the RBI paid '50,000 crores as dividend to the government in line with the Budget provisions, helping the Centre stick to its fiscal roadmap.

This amount is not to be sniffed at considering that the Union Budget amounts to Rs 21.47 lakh crores. It would be pertinent to recall that when finance minister Arun Jaitley presented the Union Budget this year, the credit rating agency Fitch had said while the Union Budget supported growth, it did not address the problem of fiscal consolidation and left weak finances to be tackled by the next government.

That India’s finances are weak is a reality that is giving the jitters to the Modi government, with the general election now just months away. The banks remained stressed under the burden of huge non-performing assets, industries like construction, engineering and infrastructure have huge stressed assets, there is a glaring current account deficit and the rupee has depreciated by 15 per cent since January this year. Interestingly, China, with which India is always compared, has a current account surplus built up through its thriving exports. India, on the other hand, has seen its exports lagging, if not negative at times. Its imports totalled $339 billion, but its exports were just $261 billion, so therefore there is a negative trade balance of $78 billion.

Against this scenario, it will be prudent to leave the RBI’s reserves at a level which it thinks best for the economy. Its foreign currency assets are a cushion against global and domestic economic shocks. If the government tries to grab the RBI’s reserves, it could deteriorate the central bank’s balance sheet and cripple its ability to stabilise the external sector, that faces serious headwinds with rising crude prices, as well as meet its international commitments to the International Monetary Fund and others. India is, after all, dependent on imported crude oil to the extent of 80 per cent.

( Source : deccan chronicle )
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