The resource-hungry Centre is unlikely to gain a windfall in one go but will still reap rich financial dividends over the medium term, as the Bimal Jalan panel is set to recommend the transfer of the central bank’s excess reserves to the government over a period of 3-5 years, a source privy to the matter said. The report of the panel, which held its last meeting on Wednesday, however, isn’t going to be a unanimous one, as finance secretary Subhash Chandra Garg is learnt to have dissented.
Although the precise size of the central bank’s surplus as estimated by the panel isn’t immediately known, indications are the first tranche of the transfer to the government could be around Rs 50,000 crore. Garg wanted the panel’s review of the RBI’s economic capital framework (ECF) to result in substantially higher transfers to the government, sources had earlier told FE.
The finance secretary also had reservations on the methodology used to arrive at the size of the RBI’s “surplus”. The panel’s report will be submitted to the central bank in the next 10-15 days. The latest FY20 Budget has pegged RBI’s dividend at Rs 90,000 crore, against Rs 68,000 crore in the last fiscal, even without factoring in the ECF review.
The surplus transfer could help the government tide over any potential shortfall in its tax revenue and contain fiscal deficit unless the panel ties the transfers to specific use like retiring public debt or recapitalisation of state-run banks. As such, the government’s reliance on the RBI’s dividend has risen in recent years, given the need to allocate more to welfare schemes like PM Kisan, even as tax collection, especially of GST, has trailed targets.
A recent report by Bank of America Merrill Lynch said the Jalan committee could identify an excess buffer of up to Rs 3 lakh crore (or roughly 1.5% of the GDP), including the excess capital in contingency reserves and revaluation reserves. The ECF, which determines the central bank’s surplus transfer to the government, was one of the contentious issues in the much-hyped tussle late last year between the finance ministry and former RBI governor Urjit Patel. During Patel’s tenure, RBI’s surplus transfer (as % of its net disposable income) dropped to 70-78%, against 100% during Raghuram Rajan’s period.
Last year, the finance ministry held that the buffer of 28% of gross assets maintained by the central bank was much higher than the global practice of around 14%. Following this, the RBI central board, in its meeting on November 19, 2018, had decided to set up a panel to examine the ECF. Brokerage firm UBS recently said: “A staggered dividend of $10 billion a year, rather than a one-shot $30 billion, is our base case.”
In February, the RBI decided to offer an interim dividend of Rs 28,000 crore to the Centre, driving up its total transfer in the last fiscal to `68,000 crore. The elevated transfer under new governor Shaktikanta Das seems like a departure from the RBI’s policy during the Patel era. In 2017-18, the RBI had transferred Rs 40,659 crore (including an interim dividend of Rs 10,000 crore in March 2018).
The Economic Survey for 2015-16 (under then chief economic advisor Arvind Subramanian) had suggested that the RBI’s excess capital could be redeployed to infuse funds into state-owned banks and help them provide more for bad assets and step up lending.
Many analysts, however, had disagreed with this and said the perception that the RBI capital was in excess of what generally other central banks had was because of the amounts held in its Currency and Gold Revaluation Account (CGRA). These analysts, including former central banker Shyamala Gopinath, have pointed out that foreign currency assets — which are being held for precautionary purposes and without a commercial intent — are a major part of the RBI’s total balance sheet assets. While these assets are periodically revalued at market rates, any gains from such exercises are unrealised and only notional. These, they reckon, cannot be counted as profits generated by RBI.
As of June 30, 2018, the RBI’s contingency and asset development funds aggregated Rs 2,54,919 crore. These funds have been created by transfers from the central bank’s income account and are in the nature of provisions for contingencies. The amounts held in CGRA stood at Rs 6,91,641 crore at the end of June 2018.
The other members of the Jalan panel include Rakesh Mohan, former deputy governor of RBI as the vice-chairman, finance secretary Garg, RBI deputy governor NS Vishwanathan, and two RBI central board members — Bharat Doshi and Sudhir Mankad.