Rs 1.76 Lakh crores booster shot for Modi government

Even as the talk of economic slowdown is getting louder by the day, the Narendra Modi government seems to be sharpening its arsenal to deal with hard times that recessionary tendencies naturally bring in.

Finance Minister Nirmala Sitharaman announced a slew of measures to infuse life into economy on last Friday, a day after young Chief Economic Advisor Krishnamurthy Subramanian termed any stimulus package to private sector as morally hazardous exercise.

His words sent markets into a tailspin as there were widespread expectations that the Government would step in to stem the rot. However, Sitharaman's booster dosage salvaged the situation, to some extent and put stock markets on green track as was evident from Monday's upswing in Sensex.

She rolled back super rich surcharge on market players including FPIs (foreign portfolio investors). Since the imposition of super rich surcharge in the Union Budget last month, FPIs pulled out funds from stock markets. Even domestic investors were reluctant to keep invested in stock markets.

In that context, FM saved the markets for the time being. Her other announcements like Rs 70,000 crore capital infusion into banks, removal of angel tax on startups and measures to nudge banks to pass on RBI rate cuts to end users are in the right spirit.

But the view on the street is that these measures are not enough to checkmate the economic slowdown that is likely to engulf the country in the wake of recessionary signals from the developed markets like the US, Germany, etc.

The Modi government got another shot in the arm when the Central Board of the Reserve Bank of India agreed to transfer Rs 1.76 lakh crore from its reserves to the exchequer on Monday.

Soon after Narendra Modi came to power in 2014, the central government started trying to dip into RBI's reserves in order to generate funds for its developmental and welfare activities. A panel headed by former RBI governor Bimal Jalan looked into the issue and recommended that the government could dip into the reserves if it wanted so.

RBI keeps reserves for any rainy day and to prop up economy when chips are down. Tapping such contingency reserves doesn't make a sound economic sense. But the Modi has been using RBI as resource point for funds. The government received Rs 1.74 lakh crore as dividends from RBI since FY16. It expects another Rs 90,000 crore this fiscal.

The latest transfer of Rs 1.76 lakh crore is over and above what the Modi government has been getting from RBI via dividends. These reserves will be released to the government this financial year itself. That means the total amount received by the government from RBI from FY16 will reach Rs 4.40 lakh crore by end of the current financial year.

That's a huge money. Of course, the government is funneling some of these funds into banking system through recapitalisation. But the government should use the funds judiciously and only for strengthening economy.

Nothing else. Otherwise, the precious reserves that RBI saved over the years will go waste. If that happens, the Modi government will pay a heavy price.