Inflation tax masquerading as dividend income

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Inflation tax masquerading as dividend income

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• RBI's dividend to GoI: In May 2021, the RBI paid a huge dividend of Rs.99122 cr to Government of India. How did it do so? How does it do so annually?
• Simple story: The RBI keeps issuing new money, that costs it nothing, but that money has purchasing power in the marketplace, being legal tender. 

1. Some of this newly issued money is in excess of what's needed to meet the needs of a growing economy
2. That excess money leads to inflation, sooner or later (or it accommodates inflation that arises elsewhere)  [this logic has not not applied to US since 2010, due to different conditions]

• Dividend income: Thus, what RBI gives to the GoI helps it buy more in the marketplace, but since this "income" is not from production, so the public gets to buy less. The GoI gains, public loses. This is effectively a tax, not visible to public, and collected via the RBI! (technically it is the "inflation tax", loosely it is the "dividend income")
• Not progressive: While income taxes are progressive, inflation tax is not. It hits those the most whose income and assets do not keep pace with inflation. These are mostly the less well-off people, hence inflation tax is regressive.
• Two questions arise: First - should the RBI share dividend with the GoI? Answer is yes. Second - Should the RBI earn so much from dividend income at all?
• India's inflation story: India has high inflation rate of 7% or so for a long time, and from 2013 to 2016, RBI and GoI discussed and decided to put a formal inflation control policy in place. That was the FIT - flexible inflation targeting policy - that put 4% as the inflation goal (CPI based). 

1. Initially it came down to 4%, but then rose sharply to 6.6% in 2020 (65% above target). 
2. Then in 2020-21 it came down again, but for 2021-22 it's rising sharply again
3. Higher the inflation, higher the inflation tax
4. The US saw low inflation since 2010, and the US Fed wants it to be at 2 per cent or more (so that average stays at 2).\

• Why have higher inflation: Perhaps the RBI thinks it's good for more output and employment. But it's not a good idea for India, in general, as history shows. The RBI must not allow the inflation tax to rise any more, and the govt. should focus on other avenues to raise more taxes.

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