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While the government has denied, quite belatedly, that it has its eyes on a special dividend of Rs 3.6 lakh cr from the Reserve Bank of India (RBI) this year, it’s a rather weak “no, no, this is all a figment of the media”.
The fact is that the government’s principal economic advisor had an extended Twitter conversation with me on this issue; and in any case, the buzz has been around, and growing louder, by the day.
So perhaps PM Modi has beaten a temporary, tactical retreat after the massive backlash. Also, while his spin masters have been trotting out monetary theories to show how this can be done without printing fresh cash, I am unable to buy such sophistry. To use a graphic phrase, all of that is simply putting lipstick on a pig.
So, how can Prime Minister Modi pick up his Rs 3.6 lakh cr “bounty” from RBI’s balance sheet? There are, fundamentally, just FIVE ways he can do that, three under the “asset monetisation” route, and two under the “print cash” manoeuvre.
Innards of RBI Reserves
Allow me, therefore, to give you the downstream impact of all these “options”. But before we list them out, let’s x-ray the innards of RBI’s reserves, using rounded off numbers for simplicity:
Note: It’s critical to understand the importance of “unrealised” here, ie: these are non-cash gains. For example, if RBI bought gold at Rs 10,000 per 10 grams in 2000, then it’s made an “unrealised” gain of Rs 15,000 per 10 grams. Likewise, if it bought 1 USD in April this year for Rs 65/dollar, then it’s made an “unrealised” gain of Rs 8/dollar.
But until RBI actually sells these 10 grams of gold or one dollar, it does not make any cash gains/profits.
And India’s laws prohibit the payment of cash dividends from such “unrealised” gains.
Please.Note.This.Point.
Five Ways To Get RBI’s Cash
Now let’s examine each of the five options, one by one:
Options Under the “Asset Sales” Route
- One: Sell gold. This one is theoretically possible, but politically/economically suicidal.
- Two: Sell G-secs (government bonds) held by RBI. This is feasible, but disastrous for money markets. The supply of G-secs will increase exponentially, cash will be sucked out, and interest rates will rise dramatically. Again, potentially suicidal.
- Three: Sell forex reserves. This will expose India to dollar bankruptcy, and over-value the rupee. Not potentially, but certainly suicidal!
Options Under The “Print Cash” Route
- Four: Cancel Rs 3.6 lakh cr of G-secs, and write off this loss to the reserves. Now buy Rs 3.6 lakh cr of fresh G-secs from the government, and pay for it by printing cash. The state’s debt is unchanged, RBI’s reserves are reduced, and the government gets hold of newly printed currency.
- Five: A clever/practical variant of Four, suggested by another distinguished expert in my Twitter exchange. Here you simply pass two accounting entries on RBI’s balance sheet, ie: Debit Reserves and Credit New Government Expense Account by Rs 3.6 lakh cr. Voila! You’ve just created fresh cash.
Now, in a tweak to Five, it has been suggested that this will be cash-neutral if the government uses this additional asset to extinguish its liabilities, because eventually, through a series of inter-related accounting adjustments in banks’ and RBI’s balance sheets, all assets/liabilities will get neutralised.
But hey, it’s a big IF to assume that Modi will use Rs 3.6 lakh cr only to sanitise assets and liabilities on inter-related balance sheets.
What if the government were to declare a universal basic income of Rs 3,000 per citizen? I know this is an extreme assumption, and I am using it merely illustratively, but can you even imagine the amount of multiplier cash such a political gimmick could create?
So sirs/ma’ams, let’s just accept the inevitable.
The only way RBI can practically pay a special dividend of Rs 3.6 lakh cr to Modi is by printing cash ... and that’s a terrible idea.
And I am not even making a big ado here about it being an “illegitimate” practice, outlawed by India’s Companies Act.
Now, who ever thought India’s economic policy makers could not think of an idea worse than Demonetisation!
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