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Aug 27, 2019
Economy View: A rainy-day giveaway from India’s central bank
By Andy Mukherjee
If he were the CEO of a corporation, Shaktikanta Das would be an investor darling.
His first full-year results, and Das is already returning more money
than the entire dividend his two predecessors could muster between them
in the previous three years. That’s just the kind of performance
activist hedge funds like to see.
But Das isn’t a corporate CEO. He’s the chief of India’s central bank,
and the record Rs 1.76 lakh crore ($24.4 billion) he’s going to deposit
in the government’s account is bound to revive a debate about the threat
to the monetary authority’s independence.
While that controversy is real, it can wait for another day. I view the
bumper dividend as Das lending his spare umbrella to a government that
has long lived in denial of the gathering clouds, believing GDP numbers
that are too sunny to be trustworthy. Now that bad news is suddenly
pouring down on the economy, it finds itself without shelter. The
central bank is coming to its rescue, and without running any immediate
risk of exposure to its own credibility.
That’s my benign interpretation. Consider the more sinister one. As
recently as last month, the government was anticipating a Rs 90,000
crore payment from the RBI, which was already 80% more than in the
previous year. For it to end up with almost double the budgeted amount
smacks of pressure. If this had really been a shakedown, though, the
outcome could easily have been a lot more shocking.
One of the reasons behind previous RBI Governor Urjit Patel’s
surprise resignation last December was a campaign by a top finance
ministry bureaucrat to raid as much as Rs 3.6 lakh crore of the RBI’s
capital by taking even some of its revaluation reserves. Such a move
would have left the institution at the mercy of an occasional capital
injection from the government, crimping its operational freedom.
Thankfully, the final decision went to a committee. On its advice, the
compromise now being implemented will leave the revaluation reserves
intact. Only the coupons and profit on sales that the RBI has actually
realized on its assets – foreign bonds, Indian government securities and
gold – will be shared more liberally with the government. And that’s
only after topping up contingency reserves so they don’t fall below 5.5%
to 6.5% of the central bank’s assets.
These are separate from revaluation reserves and, in the RBI’s own
words, are there to provide protection against the proverbial rainy day.
By choosing to drive contingency reserves of 6.8% down to the lower end
of the safe range, Das has eked out an extra Rs 52,600 crore. It’s
money Finance Minister Nirmala Sitharaman
badly needs. Private investment slumped long ago. Now even consumer
spending on everything from cars to cookies is threatened. The
government’s tax collections are falling badly behind its rosy targets,
leaving fiscal pump-priming impossible.
The extra money can buy time to halt the slide into a full-blown crisis
and must not be wasted on a thoughtless carnival of new government
spending. New Delhi should overhaul its 2017 goods-and-services levy,
and not just slash tax rates in a panic and repent when already-tepid
collections falter. Recapitalizing banks with an immediate infusion of
Rs 70,000 crore is a fine idea, but the snail’s pace at which corporate
bankruptcies are getting resolved – outside and inside the court system –
is destroying value for lenders. Also crying out for attention is the
shambolic real-estate market, which is infecting balance sheets of
developers, financiers, households and investors.
Das has already gone for the smallest capital buffer possible. If the
RBI’s assets increase next year while income on them doesn’t rise
proportionately, he’ll have to replenish equity. Any pressure from the
government to maintain the lofty dividend will then be viewed by
investors as an attack on the RBI’s credibility.
The RBI governor’s spare umbrella may give the Indian bond market a
modicum of hope today. Still, any optimism will fade quickly if the
government leaves him shivering in the rain tomorrow.
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