RBI Showers Rs. 1.76 Lakh crore: Will it Revive Economy!

 

RBI Showers Rs. 1.76 Lakh crore: Will it Revive Economy!

Hello Friends!

Hope you all are good and liking my previous posts. Today we will analyze will Rs. 1.76 lakh crore showered by RBI revive Indian economy or not. As we all know that Indian economy is going in slow down situation like sale of Maruti Suzuki and tractor sales have declined, Housing sales decline due to fall in prices in real estate sector, Decline in GDP growth rate, slow down in consumption like food items, Decline in Industrial output growth rate in 8 core sectors that is Steel, Cement, Fertilizers, Coal, Electricity, Crude Oil, Natural Gas and Refinery Products. Let’s analyze will Rs. 1.76 lakh crore help in reviving of Indian Economy or not?

Origin of Global Recession:

1. The Global recession originated in the U.S—the richest and strongest economy of the world in 2008 and spread to almost all major economies of the world.

2. The economic recession of 2008-09 was worst economic recession in U.S. after Great Depression of 1930s.

3. The economic recession in U.S. was caused by financial crisis known as Sub-Prime crisis.

4. The Sub-Prime crisis was caused by burst of housing boom.

5. Banks and financing companies failed to recover their loans from their collateral's because of collapse in housing prices.

6. Thus closure of leading banks led to financial crisis in U.S. called Sub-prime crisis or Sub-Prime Mortgage crisis.

(Also Read :Recession: Knocking at door of Indian Economy or Not!)

Features of Recession:

1. Fall in income and output.

2. Prices begin to fall.

3. Wages fall.

4. No new borrowing despite fall in rate of interest.

5. Demand of consumers for goods fall.

6. Sharp decline in stock of goods.

7. Reverse action of Multiplier that is Money Multiplier. Money Multiplier is ratio of broad money (M₃) to reserve money or base money (M₀). Thus M_b= M₃/M₀ or M_b=M₃ *1/M₀.

Causes of Slowdown in Indian Economy:

1. Role of global factors: U.S. - China Trade War is acted as a major drag on economic activity in India. It resulted in slower growth in India’s trading partners.

2. The major companies combined net profit declined by 10.1% during June. The interest liability continues to grow due to incremental borrowings.

3. India is facing a silent fiscal Crisis due to shortfall in tax revenues. It is mainly due to a shortfall in GST revenues and Personal Income Tax revenues. Personal Income means sum total of all the income received by entire people of country in one year.

Personal Income= National Income + [Transfer Payment – Undistributed Profit of corporates + Payment for Social Security Provisions]

Personal Income = National Income + Net Transfer Payment

4. India’s economy slowed down due to declining growth of private consumption, tepid increase in fixed investment and muted exports.

5. In India we are rolling out more and more social welfare schemes thus rather controlling we are increasing expenditure.

6. Lack of employment opportunities that is 6.1% unemployment rate.

7. Bank Credit slowed down. Prompt Corrective Action Framework has pressed paused button on lending. Prompt Corrective Action Framework aims to check problem of NPAs (Non-Performing Assets) in Indian banking sector.

8. Amendment to FRBM (Fiscal Responsibility and Budget Management) Act 2018 has squeezed government expenditure instead of reducing it to productive uses.

9. Demonetization (a radical policy decision) had an adverse impact on economy.

10. Automobile crisis because of 28% GST charged on cars, motorcycles and scooters, liquidity crunch due to IL&FS crisis, increase in ownership costs, floods in Kerala and many other states.

11. Mandatory transition to Bharat Stage VI emission norms.

12. Fall in farm incomes and effect on rural demand creation. Consumer Food Inflation is below general retail inflation level and averaged just 1.3% year on year.

13. Higher and non-standard road taxes.

14. GDP growth rate slowed down to 5.8% (January-March 2019). GDP is total value of all final goods and services produced in economy in given period of time that is One year. GDP includes income of resident citizens and foreign nationals that are residing within geographical boundary of country.

15. Structural problems with state owned banking system.

Rs. 1.76 lakh crore showered by RBI to revive economy:

1. RBI decided to transfer Rs. 1.76 lakh crore to centre including interim dividend of Rs. 2800 crore paid in February to address fiscal situation of the government.

2. Rs. 1.76 lakh crore includes central bank’s 2018-19 surplus of Rs. 1.23 lakh crore and Rs. 52637 crore of excess provisions indentified as per Revised Economic Capital Framework.

3. Bimal Jalan committee was formed to review economic capital framework. 2 components of economic capital:

(i) Realized equity.

(ii) Revaluation balances.

Will Rs. 1.76 lakh crore showered by RBI help to revive economy or not?

Pros:

1. Realized equity component of economic capital could be used for meeting all risks/ looses as they were primarily built up from retained earnings.

2. Revaluation balances component of economic capital could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains.

3. It will help to maintain retained earnings within 5.5-6.5%. Retained earnings is cumulatively referred to as Contingent Risk Buffer (CRB).

4. Rs. 65000 crore or additional non-tax revenues on amount of RBI’s dividend can make up for shortfall in centers tax collection to a great extent.

5. Controller General of Accounts (CGA) data suggests that net revenue growth from direct taxes was just 9.7% (April-June). There is lot of certainty over GST collections too. RBI’s surplus boosts overall revenue for centre and help meet its fiscal deficit target.

6. RBI’s Surplus fund can have a sustainable multiplier impact on overall growth in economy. Money Multiplier measures how much money supply increases in response to change in monetary base.

7. PSB Recapitalisation: Public sector Banks are under capitalized with half a dozen weak banks under Prompt Corrective Action Framework. Rs. 1.76 lakh crore funds would provide comfort to banks and shore up their valuations in market.

8. Infrastructure financing: The additional funds will help in infrastructure projects because absence of Development Finance Institutions (DFI) is a big issue because all DFI’s have turned into banks.

9. Pump Capital into Nodal agencies: There is burden on banks due to increasing farmer loans, loans to micro entrepreneurs. This fund will help SIDBI and NABARD to revive if MUDRA is not capitalized sufficiently.

10. Reduce Market Borrowings: This fund will reduce market borrowings by releasing funds to private sector and better transmission of interest rates.

11. Junk Sovereign Bond Issue: These funds will help to replace sovereign bond issue because current rupee depreciation shows that external market can change very fast and implications will be country rating and external liabilities.

Cons:

1. Government is raiding the balances of RBI.

2. In 1980’s the same practice had been used to finance fiscal deficit but it was external factor but now we are doing the same within the economy is raising repurcussions.

3. Developed economies like U.K. and U.S. can borrow with their own currency unlike Indian rupee we cannot borrow much.

4. Administrative measures are not taken into account like capital adequacy ratio.

5. It will create repurcussions as this fund will only be used to finance Non-banking financial companies like IL&FS. This fund is ignoring other infrastructure facilities like building roads, highways etc.

6. Indian economy is a developing economy not a developed economy like U.S. and U.K. so waving amount Rs. 5.5 lakh crore is too much.

7. This fund is waste if it is used to finance capital banks because their size is already low.

8. As per Article 266 whatever resources come it goes to Consolidated Fund of India. So question is whether this fund will be used for economically viable infrastructure, financially viable situation and returns are back loaded and front loaded.

9. This fund is waste until and unless we develop distinction between recurring income and non recurring income.

In My Opinion:

1. All developed countries like USA has ability to borrow in their own currency but India has not ability to borrow within their own currency in international market.

2. Create a fund where such capital will be put up and invested hence eliminating the dependence of government for the judicious use of such funds like Sovereign Wealth Fund.

3. India should develop technology to use Thorium as nuclear energy source. India has 25% of Thorium reserves. India can export thorium for very huge returns.

I hope you will like this article and at last we can say that this fund will only help the economy if it is used to create infrastructure rather than fiscal financing. Review economic capital framework of RBI from time to time in order to ensure it has required capital to ensure stability in time of crisis.

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