Selling the family jewels – Some thoughts on what to do with the RBI treasure

The world bank projects used to be put through something called a ‘socio-economic cost-benefit’ analysis

Selling the family jewels - Some thoughts on what to do with the RBI treasure
Selling the family jewels - Some thoughts on what to do with the RBI treasure

The RBI ‘surplus’ is something that is like a valued treasure. It should not be used to meet current expenditure

In a chat with Shri Sree Iyer of PGurus, we were discussing the issue of the government of India using some of the ‘reserves’ of the RBI. Naturally, the discussion organically veered to how the money can be used for the benefit of the use of that money.

When it comes to national accounts, our revenues minus expenditure is a constant negative. World over, this seems to be the trend

Firstly, this money should NOT be used to meet any ‘expenditure’ items like loan waivers or subsidies or any other such item. In any business, there is revenue expenditure, capital expenditure and a return of capital to shareholders by dividends or buyback of shares. Fiscal prudence demands that all current expenditure is met out of current revenues. Any temporary shortfall is met by increased borrowings or by some asset disposal. Asset disposal is good only when the company has no further use for the asset and there is confidence that the business continues to be a profitable one, there are no borrowings etc. It is often useful to sell a non-productive asset to reduce debt. It will make the future P&L account better by lowering the interest outflow. However, by no means does it change the EBITDA.

When it comes to national accounts, our revenues minus expenditure is a constant negative. World over, this seems to be the trend. This gap gets plugged into some extent by ‘capital flows’ and by ‘remittances’ from its citizens who have left the country and are earning in foreign currency. In a country like India, even after this, there is a deficit. This naturally leads to some pressure on the currency and causes some inflation also. Our balance of payments deficit is a chronic one and can only be curbed by either regulating imports or by growing exports. With the probability of these happening being low, the only option is to create an environment that attracts foreign capital on a consistent basis. Portfolio flows are not the answer. We may also face a situation when the foreign remittances could slow down, as the emigres from India find that they have no dependents left in India.

In this context, the RBI ‘surplus’ is something that is like a valued treasure. It should not be used to meet current expenditure. At the same time, there is a crying need for infrastructure. Many of these projects are such that the private sector should not be involved. This is because their funding tenures are small and interest costs are high. Loading both of those simply pushes up the cost of those services. Just look at the tolls on the highways or the parking charges at the airports.

Today, post-harvest handling is where the big gap is. While some private sector players are making some efforts on a small scale, the costs and are a deterrent

The “RBI surplus” is a treasure that can be best used for a developmental project where the benefits to society are enduring. In the old days, the world bank projects used to be put through something called a ‘socio-economic cost-benefit’ analysis. For instance, if we take an electrification project in a village, the benefits to that village would be manifold. Irrigation could become easier, pushing up the yields and the income for the farmer. More schools would come up. Better education would give rise to employment opportunities outside the farm. This would add to the family income of the village as the surplus labour is gainfully employed. The benefits of this are of a permanent nature and at some point, the annual surplus would be higher than the project cost, in nominal terms. However, when the private sector were to do this project, they would simply look at the price of electricity as revenue and recovery of capital with some ‘guaranteed’ returns would be the sole aim. This also leads to gold plating of costs (cultural corruption plus the risk of governments going back on written contracts) which makes the tariffs even higher. On the other hand, if the government were to simply focus on getting the infrastructure in place, the global tender would bring in lower capital costs also. Thus, this is where the amounts could go.

One thought comes to mind. Use this money for the FARM SECTOR. If we are annually writing off loans of the farm sector and still they are crying, does it not mean something is wrong? The farmer has problems with the quality of his output and the ability to reach the produce in time and quality to the end consumer. Today, post-harvest handling is where the big gap is. While some private sector players are making some efforts on a small scale, the costs and are a deterrent. Including electricity for cold storage (most of the cold stores seem to run on diesel due to poor electricity availability) there is a need for food processing on a large scale at various local hubs, to ensure better farm realization. And better post-harvest handling would also open up export opportunities. If the government could use the money here, it would benefit farmers for generations to come.

The Indian farm produce sector is spread across thousands of ‘clusters’ that are in horticulture and cash crops. While the cash crop sector seems to be better off, the horticulture sector can do with a lot of help.

Note:
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

R Balakrishnan

R Balakrishnan is an independent consultant and has been in business and finance for over three decades.He was one of the founding team members of CRISIL and also helped set up Malaysia's first credit rating agency. He was head of equity research at DSP Merrill Lynch. He has been an investment manager in global markets for a brief period. He has been associated with a Equity Research from its early days in the country. He writes for Moneylife and periodic columns for Deccan Chronicle. He has been advisor for Research for a couple of family offices as well. Currently, he is associated with an end to end farming venture with a few friends (Lawrencedale Agro Processing (I) P Ltd). The areas he worked in includes Banking, Credit, Capital Markets, Equities, NBFC Segments and Corporate Finance.
R Balakrishnan

2 COMMENTS

  1. When the opposition is clamouring for distribution of freebies to win the election,the govt which is having the interest of the country is left with no choice other than distributing freebies rather than handing over the country to the foxes which are eagerly waiting to loot and destroy and divide the country.

LEAVE A REPLY

Please enter your comment!
Please enter your name here