Transfer some forex reserves to states for covid expenses

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Transfer some forex reserves to states for covid expenses

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• Covid death toll: With the daily Covid toll consuming thousands of Indians, the union government changed policy abruptly on April 15, 2021. It asked the states to "do it yourself", forcing them to float global tenders to procure vaccines.
• Affordability: Many states may struggle to buy vaccines on their own, esp. if GST revenues remain low. Due to lockdowns, fuel tax collections will drop too. But there is one way out, if India is willing to use its foreign exchange reserves. Imports are possible using these.
• Many reasons why not done: First, the forex reserves were not used to book large quantities of vaccines, due to the Make in India (Atmanirbhar Bharat) policy. That has not helped, but harmed, in this deadly pandemic. Second, the policy was always corporate-focused, not people focused.

1. Using forex to build infrastructure was first proposed in 2004. Nothing much happened. 
2. Again in 2021, the Economic Survey spoke of using it for investment. But nothing happened.

• Immediate action: If the govt. decides to allow RBI to shift a portion of forex reserves held by it, as a grant, to all states of India, they can speedily procure oxygen equipments, bed capacity and vaccines from elsewhere in the world. 

1. The Finance Commission recommendation onf states' share of taxes is indeed a mechanism, but any change in it is too time-consuming.
2. Speedy transfer of forex to states will be a top level political decision.
3. Best way is for Parliament to legislate a new law, and effect the transfer from RBI custody. India had $580 b worth of forex reserves, and if just $200 per person is given to states, then a total of $276 b needs to be given.
4. Then more than $300 b will still remain in the RBI reserves. Will they be adequate for India?

• Adequacy of forex reserves: Normally, there are two ways to judge. First - it must cover at least 3 months of imports. Second - As per the Greenspan Guidotti rule, a country must keep enough reserves to pay back the short-term external debt, based on residual maturity. By these two measures, the RBI needs $120 b and $106 b, resp. (end of 2020 figures). If a medical emergency of life and death cannot make India take a strong call, nothing can.
• Keep population as the criterion: Since Covid hotspots are constantly changing, no criterion other than States' population will suffice. States will also like to buy preferably from local Indian firms, also in light of the mutated B.1.617 variant. If states are left with surplus forex, they can sell it back to the RBI, or the public, and get rupees for local spend. (alternative right now is for states to keep waiting for tax revenues in an uncertain economy, or borrowing at 7% from Centre)
• Why not one central purchase: Ideally, only Union should have purchased in bulk for everyone. But it's too late for that now. Speed matter now the most. The govt. must act fast, and help more people not die.

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