Image result for Where will all the money given by RBI to the government go?Gaurav Garg

The Reserve Bank of India will transfer Rs 1.76 lakh crore to the government this year, according to the Bimal Jalan Committee. The question which is left unanswered is where will this money be spent by the government?

The transfer includes Rs 1.23 lakh crore approximately from the bank’s surplus for 2018-19 and Rs 52,000 crore of excess provisions identified, as per the revised Economic Capital Framework adopted in the meeting, RBI said in a statement.

The surplus is due to the long-term forex swaps and the open market operations conducted by the central bank over the last fiscal year.

The additional amount of Rs 86,000 crore that the government will receive this year, above its budgeted Rs 90,000 crore as transfers from RBI, could be either used to provide fiscal stimulus to our economy, reduce off-balance sheet borrowings or meet the shortfall in revenue collections.

Here is our view on where all the money being provided to the government should go, based on the sectors and segments that need it the most:

Public Sector Bank Recapitalisation

Public sector banks are under-capitalised under the prompt corrective action framework of the RBI. The Finance Minister announced front loading Rs 70,000 crore of capital into banks last week, but state-owned banks will need much more capital than that. The excess capital would free them from any pressure of NPA for the next few years.

Infrastructure or Real estate financing

The banks initially did a good job of financing infrastructure projects and other projects with long gestation periods, but soon they got stuck in assets-liabilities mismatch.

In the current scenario, banks are avoiding financing infrastructure projects. The additional money could very well be utilized for financing infrastructure needs- which span to a few billions of dollars for the next decade. The government must decide the proper vehicles to provide capital to infrastructure projects and use some of its current allocation for this.

Reduce overseas and market borrowings

The government’s borrowings have been on a rise in the recent times. India’s overseas borrowings are set to rise to a record high this year as the government joins companies to take advantage of declining interest rates globally and cut cost of debt. With the aid of current inflows, the government can reduce the market and overseas borrowings.

The move is expected to help the government at a time when India is going through a period of economic slowdown, triggered by slower consumption demand and weaker investment. Even though the actual allocation announcement is still awaited, it would certainly prove to be of great help to the country.