DNA Edit: Pump primer - RBI bonanza and steps announced will boost economy

Surviving on windfall gains like rock bottom global oil prices, and slipping when such occurrences do not offer a helping hand, has been the story of India’s fiscal trajectory in the last few years.

This time, it appears no different. In line with the recommendations of the Bimal Jalan Committee, the Reserve Bank of India has already transferred Rs 1.76 lakh crore to the government this fiscal year. What exactly does it mean for the country’s economy? While there are those who see it as a bonanza for the government, opposition parties have alleged that the RBI has been ‘raided’ by the government.

The truth lies somewhere between the two hyperboles. Of the Rs 1.76 lakh crore, Rs 1.23 lakh crore is RBI’s regular dividend payment to the government, even though admittedly, it is on the very high side if previous similar transfers are a benchmark. The rest of the Rs 52.6 thousand crore is a one-time transfer, as the Finance Minister admitted.

Since the government has shown a commitment to fiscal consolidation, it is not unrealistic to expect excess money to be largely reserved to meet the expected shortfall in tax revenues. The move has partially been triggered by inadequate goods and services tax (GST) collections and clearly, concerns over fiscal deterioration may have been allayed to some extent, at least in the short term.

On the flip side, it also means that any scope for major stimulus from here on remains limited. The Modi government gained a lot in taxes due to benign global oil prices in its first term. There are also those pundits who claim that demonetization itself was the result of expected windfall gains through purged currency notes, reducing RBI’s liability.

Nonetheless, the Prime Minister’s talisman seems to be working on the markets, which reacted positively to this booster dose. After an initial volatile phase, the Sensex zoomed up by nearly 800 points, its second-biggest single session this year since the 1,422-point rise on May 20, the day of the Lok Sabha exit poll results. Investors, who cheered the government announcement last week to rollback the controversial taxes paid by foreign investors, were major gainers.

In the forex market, the rupee breached the 72-mark to the dollar after the Finance Minister said that a weak rupee could help India’s exports. What is undeniable is that the bonanza transfer has come as a huge relief to the government grappling with a tight revenue position.

It is expected to act as a stimulus for the economy, which has shown distinct signs of a slowdown. Along with the raft of measures announced last week, coupled with this transfer, the government believes is has the ammunition needed to tackle the decelerated economy. Nonetheless, it should not be considered a carte blanche. 

RBI’s mandate is to pump-prime the economy via monetary policy, while it is the government’s job to manage the fiscal front. In this exceptional case, the RBI has, in effect, taken care of the fiscal task as well.