The late-night announcement of RBI on Monday stirred many thoughts in the minds of common people and if not everyone, then at least it affected the people who understand the sensitivity of the economy.
RBI arrived on time exactly when the economy was on edge to sink. A dividend of Rs. 1.76 trillion would soon be provided to the government. Approval for the same was given by the Bimal Jalan committee afterward.
This amount, including Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF), can help in possibly two ways to save the Narendra Modi government from facing an embarrassing fiscal situation.
FIRST WAY- The central government would get ease for a little more time to stick to the status which was proposed as a fiscal deficit road map. Based on current Budget estimates, the center has set a fiscal deficit target of 3.3% of the GDP for the current fiscal, revised downward from 3.4 % pegged in the Union Budget for 2019-20. Achieving this target would have been practically impossible for the government given the not-so-impressive revenue collection figures along with slow progress of the disinvestment process. With this surplus money from RBI, the government can make sure it doesn’t slip.
SECOND WAY- If the Ruling government chooses to direct this money to push up investment giving a temporary slip to the fiscal deficit numbers, then the plausible beneficiary would be the infrastructure and housing segments which can, in turn, push other economic activities.
This will lead to a rise in consumer power in the market. This will break the vicious cycle of no-investment, no-consumption, and no-employment which the economy is facing at this juncture.
This RBI-sponsored stimulus package is also a significant face-saver for Finance Minister Nirmala Sitharaman who has been caught in an extremely difficult fiscal situation.
Indian economy continues to be in a tough spot. Banking sector and the non-banking finance companies (NBFCs) are still in the midst of a tight liquidity situation. Auto, fast-moving consumer goods (FMCG) companies are facing the heat.
According to the global rating agency, S&P, some Indian companies with high force and determined negative free cash flows would be susceptible to funding and liquidity challenges over the next 12-18 months. The growth prospects of these firms will also be affected, it said.
“We expect the Indian corporates to grow earnings by 7-8 percent annually over the next two years, down from the double-digit growth of the past two years despite the recent stimulus announcement aimed at encouraging foreign investment, auto demand, and bank lending,” said S&P Global rating credit analyst Krishnakumar Somasundaram.
Tapping the RBI reserves post a favorable report from the Jalan panel has opened up a new source of fiscal support for the government to rescue the economy. Besides the current Rs 1.76 lakh crore, there is a possibility that the government may seek another interim dividend from the central bank.
on account of the same Congress member, Rahul Gandhi took to his twitter
PM & FM are clueless about how to solve their self created economic disaster.
— Rahul Gandhi (@RahulGandhi) August 27, 2019