‘RBI’s transfer of surplus to Centre may not ease up India’s stressed fiscal status’

The transfer of Rs 1.76 lakh crore from the Reserve Bank to the Government of India is very much more than the Rs 90,000 crores provided in the budget and would certainly alleviate the fiscal stress that the Government is facing.


Quite apart from funding needs to stimulate the economy through fiscal measures, there are also concerns that the economic slowdown will impact revenue collections, and the ambitious revenue targets mentioned in the budget will not be realised. There is also the additional worry that the recommendations of the Fifteenth Finance commission, due in October 2019, may bring a demand for augmented transfer of revenue resources to the states.
The demand for transfer of reserves from the RBI has been growing for over a year. It led to disputes between the then RBI Governor, Urjit Patel, leading to his resignation. The matter got referred to a committee headed by Dr Bimal Jalan, former RBI Governor, and the then Finance Secretary, Subash Garg had wanted to record a note off dissent in the recommendations, asking for the entire surpluses to be transferred at a single go. Dr Patel has gone, as also the Deputy Governor Dr. Acharya. The present regime at the RBI is much more accommodative of the Government’s wishes. The new finance secretary has been much more accommodative than his predecessor. And hence the substantial fund flow.
Jalan committee recommendations had distinguished between revaluation reserves and realized equity. Revaluation reserves arise out of changes in values of RBI’s reserves (foreign exchange, domestic bonds, gold etc.). The committee ruled out the distribution of these, as they could be transient in nature, and could move either way. The committee categorically ruled out the distribution of these assets.
On realized equity, the committee felt that the RBI should retain enough reserves for making provision for macro risks (monetary, financial and external stability) credit risk and operational risk, calling it the contingent risk buffer (CRB). The committee recommended stress testing of the above parameters, to arrive at a 97.5% to 99.5% level of confidence on the risks envisaged. Base on this, the committee recommended maintaining a level of 6.5% to 5.5% of the balance sheet. The RBI board would then decide how much of the balance should be transferred to Government.
In line with the recommendations, the RBI central board accepted the more generous cut off provisioning level, that is, the lower bound of the CRB at 5.5% of the balance sheet, allowing for a larger transfer of funds to the Government. Given that the RBI’s realised equity currently stands at 6.8% of the balance sheet, the implied surplus is Rs.52600 crores. This is the special dividend that the RBI is opting to transfer to Government. 
On the question of regular dividend, the Board decided to transfer entirely the net income made in 2018-19, that is, Rs123000 crores. This amount is considerably higher than usual—given past trends, around Rs 53000 crores more than based on past trends and would represent a fiscal flow of close to 0.25% of GDP to the Government.There are some important features to be noted from this exercise.
First, while agreeing to safeguard the revaluation reserves, the Board has opted for a generous cut off level for provisioning, thus giving it the flexibility to transfer a larger amount of CRB to the Government. Simultaneously, in transferring the entire earnings of 2018-19 to the Government (the first time this has happened), the RBI may be stopping itself from providing a cushion for any increase in CRB for the current year—that is to say, the cushion available from current earnings has also been given away.
Second, in effect this represents a monetisation of Government’s debt. This dividend reduces the outstanding debt of the Government. It is curious that, at a time the Finance Minister Is talking abut the low internal debt to GDP ratio in the budget speech, there has been a need to resort to this monetisation. A fall out effect could well be a further weakening of the rupee and consequential impact on the current account deficit.
Third, it is clearly indicative of the fiscal stress that the Government finds itself in. There is a need for fiscal stimulus, and overestimation of revenue receipts. The Government is scrambling for resources from all sources—from public sector balance sheets, from SEBI surpluses etc. It would be interesting to ponder whether the Government has a longer-term plan for fiscal stability.
Given also that most of states’ finances are fiscally stressed, due to large welfare programmes, the fiscal situation does appear to be somewhat stressed.
The writer is Former Revenue Secretary and Principal Adviser to PM

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