Is the central government again going to demand funds from RBI?
Corona crisis has a profound impact on revenue collection.
Amidst the ongoing Corona crisis in the country, the news is coming that the Central Government can once again demand funds (money) from the Reserve Bank of India (RBI) for its urgent expenses. In fact, the government can also do so because the Corona epidemic has had a profound impact on revenue collection and is facing difficulties in meeting its regular expenses. In such a situation, it can ask the RBI directly to buy government bonds or ask for financial help in the form of a dividend.
According to the news published in the Economic Times, the coronavirus epidemic has had a major impact on the revenue of the government. The government’s budget has increased to 7 per cent of GDP. According to one estimate, this is the highest in two decades. Quoting Sabyasachi Kar, a New Delhi-based professor of public finance and policy (RBI chair), the newspaper has written that taking measures to reduce losses would be the right step. If the government spends, only then demand will arise in the economy.
Sabyasachi Kar said that central banks from America to Japan are helping their governments in combating the corona epidemic. This is also seen in emerging markets. This week, the central bank in Indonesia has agreed to buy billions of dollars of bonds directly from the government. However, countries with emerging economies have their own risks. This can affect inflation, currency and central bank autonomy.
In India, RBI cannot buy bonds directly from the government in primary markets. There is a provision in the Fiscal Responsibility and Budget Management Act, but this law is allowed to do so under special conditions. This can be done in an atmosphere of national emergency or too much economic lethargy. Although the RBI has made some purchases of bonds in the secondary market so far, it has not said yet how it will implement the plan to raise Rs 12 lakh crore of borrowings for the government in this financial year.
RBI works for the central government to raise debt from the market. Right now banks are investing in government bonds with the hope that the central bank will buy these bonds later. Right now, banks have a lot of cash and on the other hand, loan demand is limited. Because of this situation, they have invested their money in government bonds. Investors of banks in government bonds reached Rs 41.4 lakh crore on June 19. This is 13 per cent additional, compared to the end of March.
It is worth noting that due to the autonomy of the Reserve Bank and the demand of Rs 3.6 lakh crore from RBI’s Reserve Fund by the Government, there was a fierce battle in the month of October-November of 2018. As a result, on 10 December 2018, the then RBI Governor Urjit Patel had to resign his post. After his resignation, the government appointed Shaktikanta Das as the Governor of the Reserve Bank.
Actually, the pull of 2018 was not just between the government and the RBI. It was the same at the level of fiscal policy and monetary policy in the economy. Fiscal policy and monetary policy have different effects on the economy. The Reserve Bank was established under the Reserve Bank of India Act. The central bank runs its monetary system through this act. Under Section 7 of the same Act, the government issues an order to the RBI if it considers it necessary to discuss any important issue.