Relevance: Mains: G.S paper III: Indian Economy
Why in news?
Recently, the Reserve Bank of India (RBI) decided to transfer a surplus of Rs 1.76 lakh crore to the Government of India exchequer. Background
- One of the many issues of friction between the government and the central bank is the transfer of higher surplus by the latter to the government.
The RBI transfers the “surplus”, i.e. the excess of income over expenditure, to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934. o Earlier, the RBI used keep a major chunk of this surplus for its contingency and asset development. However, after the Malegam Committee (2013) recommendations its transfer of surplus increased.
- Last year, RBI formed a committee under the chairmanship of Bimal Jalan to review the provisions under the Economic Capital Framework.
- Recently, based on the recommendations of the committee, the RBI Central Board has decided to increase its net transfer to the government.
- The recent transfer includes Rs 1.23 lakh crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified under a revised Economic Capital Framework (ECF) adopted by the RBI board.
The transferred amount is over three times the five-year average of Rs 53,000 crore.
The higher surplus is due to the long-term forex swaps and the open market operations (OMO) conducted by the central bank over the last fiscal. Key Recommendations of the Committee
- Guiding principle- The committee has given the recommendations on the principle that the alignment of the objectives of the government and the RBI is important.
- Defines economic capital- as a combination of realized equity and revaluation reserves. (Central Board has decided to keep this entire capital at the level of 24.5-20%) o Realized equity- it is a form of contingency fund for meeting all risks/losses primarily built up from retained earnings.
The committee states that the entire income above the realised equity should be transferred. It currently stands at 6.8% and the committee recommends it to be in the range of 6.5-5.5% of the balance sheet. (Central Board has decided to set this at 5.5% of the balance sheet).
Revaluation reserves- it comprises of the periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.
- Surplus Distribution Policy- which targets the level of realized equity to be maintained by RBI within the overall level of its economic capital. Arguments in favour
- More Judicious use of resources- as the RBI’s reserves are far in excess of prudential requirements. These funds be utilised to provide capital to government-owned banks.
It can help offset the expected shortfalls in various tax revenues in 2019-20 and aid the government in meeting its fiscal deficit target.
It will also improve the yield of the government securities due to improved financing capability.
- Help government deal with economic slowdown- which can be addressed using these resources to provide fiscal stimulus to a sagging economy, reduce off-balance sheet borrowings or meet the expected shortfall in revenue collections.
- Many governments decide on this issue- e.g. in Japan, the government decides the quantum of surplus which the central bank transfers to the government.
- Strong position of the Reserve Bank- which had an overall fifth rank in 2018 at 26.8 per cent of its balance sheet with respect to central banking economic capital. Arguments against
- Buffer against externalities- such as potential threats from financial shocks, and the need to ensure financial stability and provide confidence to the markets.
- Crucial towards autonomy- of the Reserve Bank, which can be ensured only, maintaining a larger reserve, so that it doesn’t depend on Government in times of financial stress.
In the backdrop of resignation of the last RBI Governor, this move has been criticised by some experts as having led to erosion of autonomy of RBI.
- Can create inflationary pressures- in the economy with an immediate increased government spending, if it is not done in a proper manner.
Way Forward
In the future, it should be the endeavour of both the Government and the Reserve Bank to ensure that both risks management and needs of the economy are balanced.