Demonetisation is Dead, Long Live Demonetisation.
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!
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First Published: 09.11.18