Days after finance minister Nirmala Sitharaman announced a slew of liquidity measures including a roll-back of surcharge on FPI and domestic investors to arrest the downslide in the economy, the Reserve Bank of India (RBI) has come out with a bonanza of Rs 1.76 lakh crore for the government. This was needed by the government as its finances were stretched. In fact, there was no room for any stimulus. Now Rs 68,000 crore was earlier factored in by the government as a dividend for 2018-19. There is an addition Rs 55,414 crore that is coming as dividend in the current year. In addition, there is Rs 52,637 crore, which is coming as an excess provision write back. The RBI will also give additional dividend for 2019-20. So, where should government use current surpluses to get best results?
Public sector banks (PSBs) are under-capitalized with half a dozen weak banks under the prompt corrective action (PCA) framework of the RBI. The finance minister last week announced front loading Rs 70,000 crore of capital into PSBs, but state-owned banks need much more capital. Any additional capital would provide comfort to banks and shore up their valuations in the market. The excess capital would free them from any capital pressure in the next five years.
The absence of development finance institutions (DFI) is a big issue that the government has been facing as all DFIs have turned into banks. The banks initially did a good job of financing infrastructure projects and other long gestation projects, but soon they got mired in asset liability mismatches. Currently, banks are staying away from financing infrastructure. The additional money could very well be utilised for financing infrastructure needs, which is into billions of dollars in the next decade. The government has to decide the proper vehicle to provide capital to infrastructure projects.
Pump capital into nodal agencies
The government has been supporting farmers, agriculture and micro entrepreneurs, but the burden is falling on banks, which are not getting any refinancing support from government agencies. Take for instance, banks and other entities have doled out Rs 8 lakh crore of Mudra loans, but there is hardly any refinancing support from Mudra agency to banks. In fact, Mudra is not capitalised sufficiently. Similarly, there are government intermediaries like NHB, SIDBI and NABARD, which can be well stocked with capital to support the various neglected sectors of the economy.
Reduce market borrowings
The government borrowing programme has been rising year after year. In fiscal 2019/20, the government plans to borrow around Rs 7 lakh crore. A part of the capital can be used to reduce large government borrowings. This will not only release more funds for private sector, but help in better transmission of interest rates.
Junk Sovereign Bond issue
The government was planning to raise a part of the borrowing -- around Rs 70-80,000 crore through an overseas bond issue. The idea was to take advantage of lower interest rates abroad and lower external liabilities of the central government. There are already apprehensions in the market as such bonds come with huge currency risk. The current rupee depreciation shows that the external market can change very fast with implications for country rating and external liabilities. The trade and currency war and geo-political situation is not right for taking such a currency risk. The additional capital can be utilised to replace the sovereign bond issue.