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Govt exhausts deposits; expenditure would be on rise before elections

Anup Roy & Advait Rao Palepu/Mumbai 11 Jul 18 | 07:05 AM

Cash management bills (CMBs) are short-term money market instruments

A heavily spending government in an election year seems to be running out of cash, but its banker, the Reserve Bank of India (RBI), extends a helping hand.

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On Tuesday, the central bank auctioned Rs 200 billion of cash management bills of 70-day maturity and on Monday it increased the ways and means advances (WMA) limit for the central government by Rs 100 billion to Rs 700 billion.

The special instruments have come into play when the government’s deposits with the RBI are falling to pre-demonetisation levels, revenues are not increasing as expected, and committed expenditure pressure is mounting.

Cash management bills (CMBs) are short-term money market instruments and WMAs are an arrangement with the central bank to borrow money at the repo rate. Importantly, both instruments are used to meet immediate and temporary cash needs.

The central government’s deposits with the RBI had fallen to just Rs 1 billion as of June 8. Including those of the states, the deposits stood at Rs 1.42 billion. The situation is somewhat better after a fortnight, with the central government’s deposits rising to Rs 148.07 billion. However, it is way smaller than Rs 7.75 trillion recorded in the fortnight ended December 23, 2016, soon after demonetisation.

The last time the central government’s deposits with the RBI fell to Rs 1 billion was on September 2, 2016, two months before demonetisation.

The dip in the balance indicates that the government is continuing to spend, “which is important at this stage of the economic cycle when investment is recovering and consumption needs a boost. Both will be helpful in crowding in private investment", said Saugata Bhattacharya, chief economist, Axis Bank. 

A fall in the government’s deposits with the RBI typically results in higher government expenditure. 

The recent revision in minimum support prices (MSPs) of kharif crops will cost the government Rs 350 billion this year, while the Ayushman Bharat health insurance scheme, which will be launched soon, is estimated to cost Rs 120 billion annually.

Further, according to a Bank of America Merrill Lynch report, the spate of farm loan waivers announced by various state governments will cost the economy Rs 2.7 trillion by next year.

The finance ministry in March aimed to soothe a nervous bond market by announcing lower first-half borrowing. The lower borrowing seemed to have affected the government’s cash position, which is showing now through the CMB and WMA mechanism, say economists.

“The proximate reason for the higher resource raising through WMAs and CMBs is the lower than usual scheduled market borrowing programme of the government of India in the first half of FY19," said Bhattacharya. HDFC Bank Chief Economist Abheek Barua said it was a temporary phenomenon.

“These are seasonal effects, depending on the government’s spending programme. Fixed-deposit collections for the banking system have been tight, some money is flowing to small savings because rates are more sticky. Generally, there has been a dip in overall financial assets and household savings in the economy," said Barua.

Barua expects the central government to tide over the situation, riding on the large mobilisation of small savings certificates.

Mahesh Vyas, managing director and chief executive officer, Centre for Monitoring Indian Economy (CMIE), said: “The government is innovative in sidestepping problems in raising funds. The net effect on government finances, as we understand these conventionally, is difficult to state. But, it is apparent that the finances of the government as a whole are coming under stress." 

The recent data shows average mobilisation owing to the goods and services tax (GST) in the first three months was Rs 975.4 billion, against nearly Rs 1.1 trillion estimated earlier.

“It is possible that large balances of unsettled integrated GST have tightened cash flows, both for the Centre and the states, precipitating the announcement of the CMB," said Aditi Nayar, principal economist, Icra Ltd.

Besides, economists say there could have been a large chunk of tax refunds in the first quarter.

“I do see a fall in foreign portfolio investments or even negative flows. Rising yields, a depreciating rupee, requests for information on ultimate beneficiaries and the rising political uncertainty are influencing these flows. Foreign direct investment flows are likely to decline in FY19," said Vyas.

In the past the government was criticised for not spending enough. Banking system liquidity had dried up as the government sat on a huge amount of cash, which it auctioned to needy banks. 

There has been a marginal improvement in liquidity but it’s not enough. “Despite the government spending large amounts, liquidity is tight," said Barua. 

Since September last year till now, the 10-year bond yields have risen from 6.5 per cent to above 8 per cent by mid-June. The 10-year bond yields closed at 7.89 per cent on Tuesday.

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