Thread by @SaketGokhale

With RBI’s surplus transfer to the govt., we are now totally screwed.

When accountants do the job of economists, it’s a recipe for a mess.

Add a clueless finance ministry to the mix & it becomes scary as hell.

Let me explain to u why u should be very very afraid.

Thread 👇

A good chunk of RBI’s “income” is thru interest it earns on govt-issued bonds.

Basically, govt. issues a bond when it wants to borrow money.

Like ordinary ppl, RBI also purchases these bonds. It does that to pump more currency into the system. (1/19)

How does RBI get the money to purchase these govt. bonds?

Simple - it prints more money.

Now it’s something that needs to be done delicately.

If RBI prints too much money, it pumps more money into the system leading to inflation. (2/19)

So RBI basically prints money to purchase govt. bonds.

The govt., in turn, pays RBI interest on these bonds (just like it does to any normal person who holds govt. bonds).

The interest on these bonds is “income” for the RBI. (3/19)

So, essentially, it works like this:

Today, the total amount of money circulating in the Indian system is Rs. 100.

RBI prints Rs. 100 extra to purchase govt. bonds.

Therefore, now there’s Rs. 200 circulating in the system. (4/19)

Some of this extra Rs. 100 (printed by RBI) ends up with the govt. thru taxes paid by people.

The govt. uses a part of this extra Rs. 100 - let’s say Rs. 50 - & pays it as interest to the RBI on govt. bonds.

So RBI printed Rs. 100 extra & Rs. 50 have come back to it. (5/19)

This this Rs. 50 is now “income/surplus for the RBI”.

Now what RBI has done is transferred this Rs. 50 back to the govt.

In effect, RBI printed an extra Rs. 100 to buy govt. bonds. It earned an interest of Rs. 50 from the govt.

It gave that Rs. 50 back to the govt. (6/19)

So, effectively, while the original amount of currency in the system was Rs. 100, the RBI printed an extra Rs. 100.

Of that extra Rs. 100, Rs. 50 came to the govt. as taxes. The govt. paid that Rs. 50 to RBI as interest. The RBI transferred that Rs. 50 back to the govt. (7/19)

So plainly & simply, the RBI has merely printed extra money & that has moved from RBI > system > govt. > RBI > back to the govt.

Now if the total value of goods/services in the system remains at Rs. 100, this extra printed money leads to inflation. (8/19)

But from accounting terms, this extra money has allowed the govt. to “magically” reduce its debt without actually doing anything that’s productive.

Confusing? Here’s a little story to explain it very simply: (9/19)

A tourist goes to a hotel to get a room. He’d like to check the room first before renting.

The owner says that’s cool but the tourist will have to keep a deposit of $10 while he checks the room.

The tourist agrees & gives $10 deposit to the hotel owner & goes upstairs (10/19)

The hotel owner owes $10 to the grocer. So he runs out, goes to the grocer & gives him this $10 to clear his debt.

The grocer, in turn, owes the tailor $10. So he runs to the tailor & gives him $10. (11/19)

Now, as irony would have it, the tailor owes $10 to the hotel owner. So the tailor runs to the hotel & gives $10 to the hotel owner.

Meanwhile, the tourist has seen the rooms & doesn’t like them. So he comes back downstairs and the hotel owner returns his $10 deposit.

(12/19)

Basically, the tourist got his $10 back. But, in those 15 mins., the hotel owner, the grocer, & the tailor all cleared their debts to each other & became debt-free.

This is, essentially, how “pumping liquidity into the market” works in reality.

That’s the job of RBI

(13/19)

But when the RBI prints more money to give it to the govt. (by the whole bonds, interest, surplus return shenanigans), it allows the govt. to fix holes in the economic system without actually taking any concrete steps.

This is what leads to inflation & price rise (14/19)

The Modi govt. is now going to use this extra “surplus” from RBI & pump it into banks.

Banks will lend this money to ppl to earn interest for filling the big hole caused by NPAs/bad debts.

All this does is increases the currency in the system leading to inflation. (15/19)

The govt (thru the RBI) will now cut interest rates to encourage ppl to borrow more from banks so that this “surplus” goes into the system.

But what happens if some of these new loans also turn bad? With a fucked economy, ppl will borrow but not have money to pay back. (16/19)

It’ll only create more NPAs for banks.

Without making any changes to economic policy, the govt. has merely printed more money & is encouraging people to borrow.

But without economic reform, ppl won’t have income to pay back these new loans. (17/19)

Basically, we’re fucked.

The govt. has done temporary wizardry to prevent large banks from going bust.

But it has done nothing to improve the economy so all it has done with this “surplus transfer” is adding more mess to an existing mess. (18/19)

So yep - we’re now looking at further price rices, more bad loans in the system, and a rupee that’ll fall even further.

This is what happens when a bunch of clueless RSS bigots run the economy.

On 23rd May, u basically put a gun in the hands of chimpanzee.

Fun! (19/19)