The RBI is aware and concerned about slow growth and cut interest rates in its policy statement.
The smooth transfer of Rs 1.76 lakh crores proposed to be made as dividend to the government’s coffers by the Reserve Bank of India reflects the symbiotic ties between the government and central bank. It’s a far cry from the turbulent times when Dr Urjit Patel, the RBI governor who preceded incumbent Shaktikanta Das, quit in protest over what he felt was excessive demands by the government of the RBI surplus funds.
The RBI can afford this largesse to the government due to its strong balance sheet. As of June 2019, the size of its balance sheet was `40.5 trillion, against `36.18 trillion a year ago.
The generous dividend is a bonanza for the Centre as the finance minister had budgeted for a dividend of just `90,000 crores. This amount, the highest ever transferred to the government, was beyond the expectations of even banking analysts and brokerage houses, and will cushion the government whose finances aren't in the best of health. Its revenues have been under strain with the income from GST and income-tax collections falling short of targets due to the slowdown in the economy. More important, it also answers sceptics who wondered from where finance minister Nirmala Sitharaman would get the `70,000 crores she allocated to recapitalise public sector banks. She also announced a slew of measures to reverse the slowdown in growth and address rural distress, for which these funds will come in handy.
Significantly, it must be seen whether the government uses this money to increase its capital expenditure. The latter had been reduced due to the low availability of funds. It is necessary for the government to revive its capex as it this will also increase employment opportunities. The private sector is still to increase its investments to a robust level, as it is the sector that fuels the economy.
The economy has seen a slowdown that has been the worst in five years, with GDP being as low as 5.8 per cent in a recent quarter. The fact that even at less than 7 per cent growth, India remains the fastest growing economy among the emerging economies is of little consequence.
The RBI is aware and concerned about slow growth and cut interest rates in its recent policy statement. It is expected to announce more rate cuts in the coming months. This is also industry’s demand as India has one of the highest interest rates, specially among the developing countries with which it has to compete on the export front. Exports too have been falling, partly due to the trade wars triggered by the US.
The government, however, must do more to give a fililp to demand and private investment. It is expected that the coming festive season from Dussehra/Diwali till Christmas and the New Year will see a growth in demand, but traders are not very optimistic about the size of the demand.