Rs 1.76 lakh crore transfer from RBI to the Central Government: Will Boost the Economy

The central board of the Reserve Bank of India (RBI) decided to transfer a surplus of Rs 1.76 lakh crore to the government-its highest transfer ever in the history of Independence India, it is possible only because of the RBI earnings seems robust net income and write back of excess provisions in the contingency fund have led to the massive pay out . The share of capital expenditure as a per cent of GDP has been falling in recent years, it raises a concern, with this Government is following the recommendations of a committee chaired by former RBI governor Bimal Jalan, on capital transfer.

The surplus from the central bank comprised two components-Rs 1.23 lakh crore of surplus for the year 2018-19 and an additional Rs 52,637 crore of excess provisions identified under the revised Economic Capital Framework (ECF) ,that was made available as per the revised economic capital framework recommended by the Bimal Jalan committee. Of the Rs 1.23 lakh crore, the RBI has already transferred Rs 28,000 crore to the government in the previous fiscal, which will reflect in RBI's upcoming annual report. The transfer is also almost double the Rs 90,000 crore that was targeted in the Union budget presented by finance minister Nirmala Sitharaman .

The issue of transferring the RBI's reserves to the government has been a hot topic of debate for the past few months and emerged as a major bone of contention between previous RBI governor Urjit Patel and the government. In December last year, the RBI set up the Bimal Jalan committee to examine what level of reserves the apex bank should actually maintain, and how much it could transfer to the government.

The committee recommends: Before we delve into what the Jalan panel report recommended, let us break down the reserves of the RBI. As per the law, The RBI’s reserves consist of currency and gold revaluation account (CGRA), the investment revaluation account, the asset development fund (ADF) and the contingency fund (CF). The CGRA makes up the chunk of the reserves and has gone up substantially since 2010---at a compounded annual growth rate (CAGR) of 25 per cent to Rs 6.91 lakh crore in 2017-18. It essentially reflects the unrealized gains or losses on the revaluation of forex and gold.

Next, the CF constitutes over a fourth of the RBI’s reserves. The CF is a specific provision made for meeting unexpected contingencies from exchange rate operations and monetary policy decisions. The RBI contributes a notable portion of its profit to the CF.

The amount of surplus that the RBI must transfer to the Centre is determined based on two things, realized equity and economic capital. The Jalan panel has recommended that the CF be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet.

Piyush Goyal, Commerce minister said, the RBI decision to transfer only Rs 52,637 crore from its excess reserves is "grossly inadequate" given the central bank's huge buffers, and more should have had been done to boost growth. On his reply, to the criticism that Rs 1.76 lakh crore transfer being a loot, Goyal explained that Rs 1.23 lakh crore is part of the regular surplus transfer. When asked about the country is moving towards Recession, Goyal said we are not in a recession, but conceded that the growth has slowed down. He said, the government is conscious of the same and acting to help the economy.

The current CF outstanding stood at 6.8 per cent of the RBI’s balance sheet and hence, the excess from the pre-decided range of 5.5-6.5 per cent is written back. Here, the panel decided to go with the lower threshold of 5.5 per cent and hence the excess Rs 52,637 crore has been written back (to be transferred to the Centre). Hence a total of Rs 1,76,051 crore has been paid out to the Centre.

The strong net income in 2018-19 may have come about due to the net interest on LAF (liquidity adjustment facility) operations turning positive after being negative for two years. It is possible that in 2018-19, the net interest income was positive owing to tight liquidity, leading banks to borrow from the RBI, earning it a tidy income. For the current year though, the huge amount handed over to the Centre may just do the trick on the fiscal deficit front.

Based on CGA provisional figures for FY19 (in which income tax grew by a modest 7 per cent), the estimated growth in income tax collections for FY20 works out to 23 per cent. For April-June, CGA data suggests that the net revenue growth from direct taxes was just 9.7 per cent. There is a lot of uncertainty over goods and services tax (GST) collections too. Hence the RBI’s surplus could boost overall revenue for the Centre and help meet its fiscal deficit target.

However, the manner in which the funds are used will be critical, the government will use the amount as a stimulus. While this is surely a big gain for the government, it will have a tough time justifying the transfer of such a big amount into its kitty. With all good faith to boost the economy, the Centre will need to put the RBI’s surplus funds to productive use, to see the growth in the overall economy of the country.