The FD target for FY 2019-20 is an unreachable 2.85 per cent of GDP.
The Reserve Bank’s decision to transfer Rs 1.76 trillion to the government as surplus follows the “golden mean” principle, often used by committees.
This bonanza comes courtesy an “Expert Committee to Review the Extant Economic Capital” of the RBI, constituted in November 2018, which has now recommended a higher level of transfer as against the transfer in 2018-19 of just Rs 400 billion, plus another Rs 280 billion transferred in February 2019, just before the general election, as interim dividend.
Curiously, this latter amount was transferred from the RBI in FY 2019-20 but showed up as receipts with the government in FY 2018-19. This “magical time travel” has a mundane explanation. The RBI fiscal year (June to July) overlaps two successive fiscal years (April to March) of the government.
The government should thank Saurabh Chandra Garg, then finance secretary, for this bonanza. Mr Garg, as one of the members of the RBI committee, dug in his heels and preferred to resign from the committee and face a transfer, rather than agree to anything less than a transfer of Rs 3 trillion — an unusually risky, maximalist stance for a career bureaucrat without any political backup.
He was a lonely crusader, up against two former secretary level government economists and former RBI brass —former governor Bimal Jalan and former deputy governor Rakesh Mohan – the chair and vice-chair of the committee respectively; one serving RBI brass — deputy governor N.S. Vishwanathan; industry nominee Bharat Doshi, a member of the RBI governing board and a long-time senior executive of Mahindra and Mahindra from the Keshub Mahindra days, and a former IAS officer, ex-Gujarat chief secretary Sudhir Mankad.
Sadly, Mr Garg exited both the committee and his position as finance secretary, while the committee speedily submitted a “golden mean” of a recommendation. It devised a suitable formula to transfer a “surplus” equal to the average of Rs 680 billion — the amount the government got last year and
Mr Garg’s insistence for a transfer of Rs 3 trillion (less Rs 280 billion interim dividend already paid in February 2019) this year. Do the maths. It’s exactly Rs 1.7 trillion.
The committee also recommended changes for calculating risk equity, called for a ban on interim dividends, alignment of the fiscal years of the RBI and the government and prescribed a band for maintaining the Contingency Risk Buffer (CRB) between a low of 5.5 and a high of 6.5 per cent of the RBI balance sheet. It noted that as of June 30, 2018, the CRB level was just 2.4 per cent and the target CRB level just 3.7 per cent, as against its significantly stiffer provisioning norms.
What the committee conveniently ignored was that as of June 30, 2019 the CRB level had already increased to 6.8 per cent — see the RBI Press Note of August 26, 2019. So even the committee’s normative maximum target was lower than the actual level. It further delegated determination of the appropriate level within the band, to the RBI’s governing board. This august body decided that the lowest recommended level of 5.5 per cent would be sufficient.
Consequently, this year, the government will receive the entire net income of RBI for FY2018-19 of Rs 1.23 trillion plus Rs 0.54 trillion being the excess provision in the CRB, net of the interim dividend already transferred to the government last year of Rs 0.28 trillion, which works out to Rs 1.49 trillion.
What does this bonanza mean for the government’s finances? The existing Budget provision for dividends/surplus from the RBI, nationalised banks and financial institutions is Rs 1.06 trillion — 43 per cent higher than last year’s receipts of Rs 740 billion. But the final receipts this year will be even higher because RBI alone is transferring Rs 1.49 trillion this year as against Rs 680 billion last year — an increase of 119 per cent.
Where is this net increase going to be used? Money is fungible, so it can be used anywhere. Many want it used to improve bank balance sheets — the mother lodes for growth. But Rs 700 billion is already available in the Budget for this, which is being disbursed. Also, banks benefit from the 1.1 percentage point fall in the repo rate since December 2018, which is not fully passed on to consumers.
More compelling beneficiaries are two areas where the Budget provisions are unrealistic. First, revenue receipts are budgeted assuming a 20.2 per cent increase over the actual receipts of Rs 13.3 trillion in the previous year FY 2018-19. Nominal growth this year is unlikely to average more than 9.5 per cent (6 per cent real growth, plus 3.5 per cent inflation). This forecast assumes that the dipping trend in Q1 real growth, which bottomed out at 5.5 per cent in June will likely be extended into Q2 (July-September).
At the assumed tax buoyancy of 1.20 (an increase of 1.2 per cent in tax revenue for every additional one per cent of growth), tax receipts can grow at 11.4 per cent to Rs 14.7 trillion. This is Rs 1.8 trillion short of the budgeted target.
Second, disinvestment proceeds might fall short of the Rs 1 trillion target by around Rs 200 billion in a choppy stock market.
However, it is encouraging that the government was cautious with revenue expenditure during Q1, with disbursements at 26.9 per cent of the Budget lower than the 29 per cent achieved in the previous year.
The net shortfall in revenue of Rs 1.21 trillion, or 0.6 per cent of GDP, can be further reduced to Rs 0.7 trillion, or 0.4 per cent of GDP, by reducing revenue expenditure (other than interest payments and capital grants, the latter being growth kickers) by an additional 3.2 per cent, or Rs 500 billion.
Our fiscal deficit (FD) target this year of 3.3 per cent of GDP will come under stress because nominal GDP will be three per cent lower than budgeted, costing us around Rs 200 billion as fiscal space. The FD target for FY 2019-20 is an unreachable 2.85 per cent of GDP.
The N.K. Singh committee had suggested in 2017 a relaxation of 0.5 percentage points in the FD target to accommodate shocks. This year’s target can justifiably relaxed to 3.35 per cent, fairly close to the achievable FD level of 3.6 per cent, by pruning low priority revenue expenditure. We shouldn’t let the RBI largesse to go waste, especially when the oil and rain gods are favouring us.