RBI provides FM breathing space but not much more--bailout will rescue the PM Kisan scheme, not much else

In traditional middle-class families, we take our saving very seriously. Family elders frown if we have to dip into our savings to cover up for shortfall in incomes. We save for a rainy day and don’t touch them unless hit by a torrential downpour. The question is, is it really that bad that the government had to resort to such desperate measures?

The long and short of the story is this- the economy is in a mess, the government probably realizes that it cant tax you any-more. It has hence gone and broken the family piggy bank, hoping it would kickstart consumption cycles. The question is, what happens if it doesn’t? And then what happens next year?

A closer look indicates that the additional windfall from the RBI is the only way the government would have been able to finance the ambitious PM Kisan scheme which played a key role in the re-election of the BJP government. The government is essentially selling family silver to bankroll a scheme which was brought because the government had failed miserably on the agricultural front.

The Reserve Bank of India on Monday approved a payout of ₹ 1.76 lakh crore and while the details of the transfer are technical in nature, the key take away for all of us are simple, the economy is in a deep ditch and this money would only help the government stay afloat for another year. What happens next year is anyone’s guess.

The political reactions have been sharp. Congress leader Rahul Gandhi put out a tweet saying “PM & FM are clueless about how to solve their self-created economic disaster. Stealing from RBI won’t work - it’s like stealing a Band-Aid from the dispensary & sticking it on a gunshot wound. #RBILooted.”

To put Rahul Gandhi’s words in perspective, the government had first shot India on the foot by bringing in demonetization and was now seeking to cure the gun-shot wound by stealing a Band-aid from the dispensary. Worse, the government seem to be applying the band-aid on the other foot. The government clearly did not have too many answers.

Finance Minister Nirmala Seetharaman addressed the media on Tuesday and while the effort was to hide behind the credibility of Governors past, she could only come up with some brave words. “We want entrepreneurs to carry on with their business without a worry. Whatever be the size- small, medium, micro, nano or large entrepreneurs of this country, we want them to carry on with their business without a worry," said the FM but only if words could fix the economy. It is now clear that the second term of the BJP government is off to a disastrous start and only time would tell if the government would be able to retain a façade of growth in the coming years.

Between the intense political debate on the issue, it is important to understand how big is the ‘transfer’ this year and if Rahul Gandhi is right in taking up the issue. The government had initially budgeted ₹90,000 crore as ‘transfer’ from the RBI but realizing that there is going to a massive shortfall in revenues, the government is getting another ₹86,000 crore from the government, which is only marginally lower than the ₹87,217.50 crores allocated to PM Kisan Yojna for for year 2019-20.

Would it not be fair to say that the entire PM Kisan scheme has been financed from these additional transfers from the RBI?

The magnitude of the RBI transfers indicate the sheer volume of life support needed to balance the books of the government, the ₹1.75 lakh transferred this year is roughly ₹30,000 crore more than the amounts transferred by the RBI over the three years. What is more, it is more than five times the money transferred in FY 2013. It seems unlikely that the transfer of ₹1.76 lakh crore from the RBI can be made into an annual affair. That would be an important question to ask the Finance Minister when she addresses her next Press Conference.

We need to put the RBI transfer in the context of the fiscal deficit which had reached 61% of its annual fiscal deficit target by June itself. First quarter data indicated that the revenue collections were growing at a paltry one percent and the government clearly seeing the writing on the wall. Revenue collections would be poor, consumption was on the decline and the only way they could stick to their FRBM commitments was to cut expenditure, pushing consumption into a massive negative spiral. This despite a budgeted ‘transfer’ of ₹90,000 crore from the RBI, almost double of what the government got last year.

Considering the mess were are in, the government needed more. It needed almost double of what was promised in the budget because people are struggling to meet their basic needs. Businesses are not growing, inventories are piling up and everyone is living through a nightmare with no dawn in sight. Corporate taxes have simply not been able to keep up.

The government also has self-inflicted pain because of GST. Tax collections have averaged at Rs 1 lakh crore over June and July which is around 5-7% higher than last year but the problem for the government is that it had promised to keep raise the share paid to states by 14% every year. Since revenues are not rising by 14%, the Union government is ending up giving up a larger share to the states. And there are signs that the government is struggling to keep its commitment to the states.

The RBI heist is perhaps the only option this government had after it faced serious criticism about how it handled fiscal deficit in the last year. Whatever numbers the government put out, the feeling on the street was that the deficit numbers were close to 6%, if we factored in the total off-books borrowings.

With the ₹1.76 lakh crore coming from the RBI, the government will have the fiscal space to achieve the deficit targets but the question is what will the government use the money for? Will it be used to provide some incentives to boost demand or will it just be used to ensure that there are no spending cuts?

The Finance Minister does not appear to have too many ideas about how to she plans to use the newly acquired fiscal breathing space. “I can’t talk about how to utilize it now. We will take a call and then let you know," she was quoted as saying at a press conference in Pune.

Now that the government has the money, it can provide some relief to the auto industry and other sectors which have hit serious problems but the government would also be aware of the fact that it only has breathing space, not enough to engage in fixing the mess that has been created over the years. They can take some corrective action, provide some relief but it is not enough to script a dramatic turn-around, that India awaits, considering the mess we find ourselves in.

As I said in my post-budget analysis, one feels sorry for Ms Seetharaman. She didn’t cause the mess, at least in the Finance Ministry, and she does not have any room to make any mistakes, like the a ₹1,400 crore tax that wiped out ₹14 lakh crore of wealth. You are leading the economic future of the country at a critical time. Get your sense of direction right. We all have families to feed and provide for.