Government must use RBI’s balance sheet to finance COVID-19 vaccines for all

The vaccination drive in Mumbai has faced roadblocks due to lack of doses (File image: Reuters)

The COVID-19 second wave in India has caught everyone by surprise. We are scrambling for all types of medical resources and facilities, from medicines to oxygen cylinders to hospital beds. The blame games are on, with the anger focused on the government. Within government, battle lines have been drawn between the Centre and the states, with both hurling at each other. In the process and lost time, the greater tragedy is the loss of lives.

In all this chaos, what is totally unacceptable is our vaccine policy. It is startling as to how we have moved from being a surplus vaccine producer to a deficit one. It was as if Milton Friedman’s truism had come correct: “If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand”. Replace sand with vaccines and five years with five months and narrative is the same.

On procurement, we have moved from central procurement to states procurement, which in turn has led to multiple prices for the same vaccines across states. If it was a competitive market with multiple prices, it was fine. But this is hardly competitive, and instead will lead to poor economic outcomes.

One also hears economists and politicians pop the question: ‘Where is the money for vaccines’? This is surprising as both on moral and economics grounds this should not be a question at all. On the moral front, people are dying and suffering in unimaginable ways. Vaccine is seen as a way to mitigate the impact of the disease, and thus reduce suffering. Who else but the State to help vaccinate people?

On the economic front, the government always finds ways to finance all kinds of expenditures — why can’t it find money for such an emergency? The Union Budget marked Rs 35,000 crore for the COVID-19 vaccines, and it is not clear what happened to the amount. Even without the Budget, we have suggestions from economists to finance the vaccines. Sashi Sivramakrishna citing principles of Modern Monetary Theory suggested that a country issuing its own sovereign currency such as India can finance the vaccines without any constraint.  Vivek Moorthy and Gurbachan Singh have written on using Reserve Bank of India (RBI) reserves to manage this emergency. Philosophically, whether we use MMT transfers or forex reserves, they mean the same that we use a mix of fiscal and monetary policy to finance the vaccine programme. Let me just explain the arguments behind using forex reserves.

The RBI currently has a balance sheet of nearly Rs 60 lakh-crore. On the assets side, there are foreign exchange reserves of Rs 40 lakh-crore, government securities worth Rs 14 lakh-crore, and rest is in gold and other investments. On liabilities, we have currency worth Rs 30 lakh-crore, deposits of banks and governments (Centre and states) at Rs 15 lakh-crore, and the rest are reserves worth Rs 15 lakh-crore. These reserves on liabilities accrue due to gains made on assets such as foreign exchange reserves which are not booked as profit but kept as reserve for exigencies.

The idea here is to use these large RBI reserves to buy the vaccines. We can use the forex reserves to buy global vaccines. The central bank can transfer a large percentage of its liability reserves as dividend to the government to enable procuring vaccines from domestic suppliers.

Obviously whichever reserve you use, there will be some impact on the other reserve of the balance sheet. If we use forex assets, the liability reserves will decline as there will be a lesser amount of forex assets (or government securities) for booking accounting gains. Likewise, a dividend transfer will lead to selling forex assets or government securities. The amounts here are very large and can easily finance India’s vaccine programme.

The highly-controversial 2019 Jalan Committee to study the RBI’s reserves policy said that the reserves should be used to safeguard against a ‘rainy day’. While the committee had in mind a deep financial crisis as a possible rainy day, it never imagined the current pandemic. But one can guesstimate that if the committee recommendations were reviewed today, it will agree to transfer these reserves. After all, the COVID-19 crisis is a mother of all rainy days with a ‘rare fat tail risk’ that has shocked economics, finances and livelihoods in one sweep.

We have had these discussions in the early 2000s on using the RBI reserves for funding infrastructure. Then RBI Deputy Governor YV Reddy objected to using these reserves saying we earn reserves from short-term foreign capital flows which could reverse unlike China which earns reserves from its exports. Some of this justification applies today but the ever prudent YVR has also mentioned the need to have escape clauses in matters of public policy.

If the second wave was not enough, we are already being warned of a looming third wave. In this regard, we need to move quickly on the vaccine front. It is here we have completely lost the plot. The government needs to form an emergency interdisciplinary committee of experts to act quickly on putting the vaccine policy back on the rails. Let’s also stop saying we don’t have the money to fund vaccines.