No windfall

One of the biggest sources of friction between the Union government and the Reserve Bank of India (RBI) is history now, with the latter accepting the recommendations of the expert committee, constituted under the chairmanship of former RBI governor Bimal Jalan to review the economic capital framework. The RBI board has decided to transfer Rs 1.76 trillion to the government. This includes about Rs 1.23 trillion of surplus income in 2018-19 and Rs 52,637 crore worth of excess provisions recognised in accordance with the framework recommended by the Jalan committee. Since the central bank has paid an interim dividend of Rs 28,000 crore and the government has budgeted for Rs 90,000 crore in the current fiscal year, the additional transfer would amount to about Rs 58,000 crore. 

The committee has put in place new ground rules for risk provisioning and surplus distribution. A clear distinction has been made between realised equity and revaluation balances. The committee has noted that any shortfall in the revaluation balances can be met with provisioning from net income but the surplus revaluation reserves cannot be used for the provisioning of other risks. In terms of the distribution of surplus, the committee recommended keeping the realised equity, which is essential to cover operational and credit risks, in the range of 6.5 per cent to 5.5 per cent of the central bank’s balance sheet. The realised equity in the RBI’s balance sheet stood at 6.8 per cent. 

The RBI has gone the full distance, not just in the chosen level of realised equity but also by transferring the entire surplus capital in one year. It can be argued that since the government had budgeted to receive only Rs 90,000 crore from the RBI, which is more than covered by the unusually large dividend payout, there was no pressing need to transfer the entire amount of excess capital in one shot. A staggered approach would have been better, even if the central bank decided to bring down the realised equity to 5.5 per cent. 

Now that the RBI has done what it can to please the finance ministry, what should the government, which has an unbudgeted cushion of Rs 58,000 crore, do? Given the expected revenue shortfall this year, this unbudgeted receipt should be used to make up the deficit. It would hurt market sentiment if the government is not able to attain the fiscal deficit target despite more than budgeted receipts from the central bank. Should there be a cushion after meeting revenue shortfalls, the priority should be to use what is a one-time bonus to introduce more honest accounting, and reduce or eliminate off-balance sheet borrowing to meet government expenditure. Going by the recent Comptroller and Auditor General report, this off-balance sheet borrowing is substantial. There will be a lot of clamour for a fiscal push, using the excess money received. But the government’s focus should be on wise use of a one-time bonus. 

Overall, in the given circumstance, the additional transfer from the RBI will not have a material impact on government finances. It is important to address the issues in the goods and services tax to enhance revenue, and push regulatory reforms to revive growth in a sustainable way.

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