On the face of it, the decision of the Reserve Bank of India [RBI] – India’s apex bank which manages the currency and payment systems as also the borrowings of the Government of India [GOI] and of state governments besides supervising or regulating banks – to transfer a whopping surplus of Rs 176,000 crore to GOI for the year 2018-19 [for RBI, the accounting year is on July-June basis] gives an impression that the latter has got a bonanza. While, some argue that the centre has ‘stolen’ the money from the RBI [e.g. Congress], others aver that this is easy money which the centre will use for bridging its fiscal deficit. The reactions are exaggerated.
First, of the total amount Rs 176,000 crore, the union government had already received Rs 28,000 crore as interim dividend [announced by RBI is February, 2019] which was accounted for in its financial year [FY] 2018-19 [April-March]. So, the amount it will get during the current FY is Rs 148,000 crore. Further, in the budget for 2019-20, the finance minister had provided for Rs 90,000 crore [implying this amount has already been accounted for while projecting receipts and expenditure and resulting fiscal deficit for the year]. So, the extra amount or the so called bonanza is just about Rs 58,000 crore.
This amount does not even fully cover the Rs 70,000 crore that the finance minister, Nirmala Sitharaman has promised to give upfront as yet another dose of re-capitalization to public sector banks [PSBs] [on top of over Rs 250,000 crore already given in the previous four years – under project Indradhanush – to shore up their capital which was eroded by unsustainable high level of non-performing assets (NPAs)] so that they can resume lending on the intended scale and help revive the sagging economy.
This won’t be of any help in compensating for the expected massive shortfall in tax revenue vis-à-vis the set target [at Rs 1640,000 crore the projected increase over the actual of previous year is 25% as against an increase of mere about 6% achieved during 2018-19] or increasing its capital expenditure – beyond Rs 330,000 crore provided for in the budget – necessary for giving a push to infrastructure.
In any case, there is absolutely no question of the government getting any help to reduce its off-budget liabilities or clearing the deferred payments on major subsidies viz. food, fertilizer and fuel [together, these deferred payments add up to about Rs 140,000 crore] – as is being speculated in some quarters.
From the perspective of RBI also, it is not as if the apex bank has showered extraordinary benevolence. The transfer of Rs 176,000 crore is in two parts: (i) Rs 123,000 crore is the surplus generated from its operations [typically, its income comes from the returns it earns on its foreign currency assets (FCAs) in the form of bonds and treasury bills of other central banks or top-rated securities and deposits with other central banks as also management commission on handling borrowings of state governments and the GOI] which saw a huge increase last year and the whole of it is being transferred.
This is in sync with the policy followed during the last five years [2013-14 to 2017-18] when the RBI transferred 100% of the surplus to the centre. The transfers during 2015-16, 2016-17, 2017-18, were Rs 65,900 crore, Rs 40,600 crore and Rs 58,000 crore respectively [in 2016-17, the amount was less due to steep increase in cost of printing notes (courtesy, demonetization November, 2016) and some provision for transfer to contingency reserve]. So, there is nothing unusual about it except that RBI generated record surplus during 2018-19.
The second part about Rs 53,000 crore is the excess of the ‘realized equity’ capital which is the difference between the current 6.8% of the assets and minimum ‘Contingency Reserves’ needed to be kept for unforeseen contingencies. This threshold is fixed at 5.5% being the lower end of the 5.5% – 6.5% range recommended by the Dr Bimal Jalan committee on ‘Economic Capital Framework’. Some critics have objected to using 5.5% instead of the upper end 6.5%. This criticism is not tenable as the calculation in no way violates the committee’s prescription – being a range, the RBI is well within its right to pick up any figure as long as it falls within the range.
This transfer is also not something out of the blue. It is based on recommendations of Dr Jalan committee which considered all relevant factors – including potential threats from financial shocks, the need to ensure financial stability and provide confidence to the markets – for arriving at a scientific basis.
The extra amount about which a hue and cry is being made is a modest Rs 53,000 crore and that too is one time [this is a fraction of the bloated excess reserves recommended for transfer e.g. over Rs 300,000 crore by ex-chief economic adviser, Arvind Subramanian based on very liberal global benchmarks for which Modi – government received flak from all and sundry]. This is far from something that could be construed as extraordinary benevolence.
From next year onward, the transfer to the union government will only go down as with increase in balance sheet size, maintaining risk buffer or ‘contingency reserves’ at 5.5% will require a larger amount of provisioning out of the surplus.
To sum up, the ‘Economic Capital Framework’ proposed by the committee [and accepted by RBI in its entirety] ring fences the central bank against any attempt by the union government to use it as a milch cow to meet its fiscal deficit target year-after-year. Being bound to the framework, the RBI will continue to exercise a tight leash on surplus transfer in the future. Therefore, the centre will need to work hard to stand up on its own for managing its fiscal health.