How government can put RBI's Rs 1.76 lakh crore windfall to best use

By Ram Singh
On Monday, the Reserve Bank of India (RBI)
transferred Rs 1.76 lakh crore to GoI. It’s a much-needed shot in the arm of the finance ministry that, last Friday, had announced a raft of measures to revive the economy. These measures — recapitalisation of banks, refund of input tax credits to businesses and exporters, clearing of dues of public sector undertakings (PSUs) — are aimed at improving liquidity in the system. By reducing the fiscal deficit, the RBI transfers will further help improve availability of funds for the private sector. But the real problem isn’t a shortage of liquidity. Money hasn’t disappeared from the system. It’s just that nobody wants to use it for investment. Interests are low, and expected to fall further, and global debt with negative yields has ballooned to $17 trillion. With plummeted cost of debt, one would expect investors to queue up to borrow to invest. But that’s not happening. The debt-equity ratio is at an all-time low. Consequently, the total investment has declined to less than 30% of GDP, lowest in the last 15 years. 
Clearly, increase in liquidity in itself is not enough. Moreover, GoI appears to be rigid about fiscal deficit targets, and tax collection is expected
to fall short of expectations. Still, several measures can be taken without violating fiscal
limits. GoI should use the RBI reserves received to expedite investment of Rs 2,27,849
crore budgeted for the Pradhan Mantri Gram Sadak Yojana, Bharat Mala and the Indian
Railways. Today, infrastructure investment is key to reviving the economy.
Bundles of roads, highway, railway tracks and urban development projects should be rolled
out double-quick. This will immediately boost core sectors like steel, cement, petroleum
and power. It will also attract private sector investment in infrastructure and increase
competitiveness by reducing logistical bottlenecks.

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