Modi Printing Rs 3.6 Lakh Cr Would Be Worse than Demonetisation

Raghav Bahl explains what it would mean for the RBI to print Rs 3.6 lakh cr, a sum equal to 2% of India’s GDP.

Image used for representational purposes.

(Photo: Erum Gour / The Quint)

(NOTE: On Friday, 9 November, Subhash Chandra Garg, Economic Affairs Secretary in the Finance Ministry, said in a tweet, “Lot of misinformed speculation is going around in media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated.”

This denial has come after so many days of public speculation, which simply proves that the government was /is seriously contemplating such a manoeuvre.)

Exactly two years ago, to the day, Prime Minister Modi had demonetised India’s cash. While most analysts were bewildered, struggling to figure out “heck, what just happened”, I had asserted categorically that Modi’s missile would be a dud.

Now, I am not a renowned economist or monetary theorist. I just relied on my entrepreneur’s instinct, having seen people “live through” crises, cash shortages and threats to expropriate property. They usually hang on for dear life. They fight back. They clutch at straws. They survive. So I was clear that they shall wash every bit of cash back into their banks!

Gimme Two Percent of GDP in One Shot

I am now watching, with equal mortification, the misadventure that Modi is planning to inflict on the Reserve Bank of India (RBI). Frankly, my mind boggles at the audacity of coercing RBI to pay a special dividend of Rs 3.6 lakh cr, equal to nearly 40 percent – pause and repeat, 40 percent – of reserves accumulated over decades.

And if your mind is still not spinning, here’s a nudge – it’s 2 percent of India’s GDP. In one shot. Incredible.

The other day, I got into a Twitter spat with two extremely distinguished gentlemen, one a much feted former CFO of Infosys, and the other a principal economic advisor to the Modi government. For those of you who like their scraps in 280 characters at a time, here are the threads.

I have replayed these two conversations in my mind a million times since then, to understand if I got it wrong. But a million times the answer has come back, unequivocally – what these esteemed gentlemen are saying is intellectually refined stuff; but it’s still a bit of monetary sophistry. Whichever way you cut it, RBI will have to print cash or sell assets if it has to pay this special dividend. All other theories are simply putting lipstick on a pig.

At an instinctive, entrepreneurial level (here, I am trotting out my post-demonetisation hat again), the conundrum is not that complex. The only way I can pay cash to somebody is by either selling/mortgaging my assets, or, if I don’t have enough of that, I could, heaven forbid, just steal it from my neighbour.

Now, since RBI is a God-fearing citizen who has been given a statutory power to print cash, it does not need to steal. 

It can pay cash by selling/mortgaging assets, or by printing currency. Any other way is just, well, academic sophistry.

Five Ways to Get RBI’s Cash

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, without counting the myriad tweaks or derivatives, all of which shall arise from one or more of these core methods.

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:

Rs 3 lakh cr

Retained/accumulated cash profits over several decades

Rs 7 lakh cr

Revaluation of gold/forex reserves (unrealised)

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 has actually sold these 10 grams of gold or one dollar, it has not made any cash gains/profits.

And India’s laws prohibit the payment of cash dividends from such “unrealised” gains. Please. Note. This. Point.

Now let’s examine each of the five options:

Options Under the “Asset Sales” Route

• Sell gold. This one is theoretically possible, but politically/economically suicidal
• 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.
• 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

• 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
• A clever/practical variant of the above point (point number four), suggested by the distinguished expert in my Twitter spat. 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 point number five, it has been suggested (in my Twitter spat) 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 / madams, 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, whoever thought India’s economic policy-makers could not think of an idea worse than Demonetisation!