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RBI transfers huge sum as "surplus transfer" to government
Read more on - Polity | Economy | Schemes | S&T | Environment
- The story: The Reserve Bank of India's board approved a significantly higher than expected surplus transfer to the government, as part of a regular annual process. It clearly was in higher, in light of the damage from a crippling second wave of the novel coronavirus.
- Details: The RBI will do a surplus transfer of Rs.99122 crores ($13.58 billion) for the 9-month period from July 2020 to March 2021. Also, RBI will move to an April to March accounting year from 2021/22, from a July to June year.
- The lockdowns across states has hit revenue collection badly, and RBI's higher-than-expected dividend or surplus transfer to the government comes as a temporary relief to the government.
- The surplus likely reflects the central bank's higher income from their open market operations as well as receipts from FX sales, with its transfer to the government providing some cushion to the shortfall in revenues.
- The RBI decided to maintain the contingency risk buffer at 5.5%, which is at the lowest end of the 5.5-6% range prescribed by the Bimal Jalan Committee that had reviewed the RBI’s economic capital framework.
- Government expectation: The government had budgeted a surplus of about Rs. 50000 crore from the RBI, in the budget 2021/22, while in the previous full accounting year, the RBI had transferred Rs.57128 crore, as surplus. Barring 2018/19, this is the highest ever transfer by the RBI in a year. In FY19, Rs.1.76 trillion was transferred to the government (which included a one-time transfer of extra reserves). The government is likely to find it challenging to meet its privatisation and disinvestment target of $24 billion while goods and services tax revenues are also likely to fall.
- Cut spending: The government is under pressure as it may be forced to cut expenditure, but it badly needs to spend to push investment and perk up growth from record low levels that it hit in 2020. The dividend from RBI will be welcome but the government will need more and hope divestment can deliver.
- The considerably higher surplus transfer would provide a buffer to absorb losses from indirect tax revenues anticipated in May and June 2021.
- The high commodity prices at a time when demand and pricing power are subdued, would dent the margins of corporates in many sectors, compressing the growth in direct tax collections. The govt. had substantially reduced corporate income tax rates in September 2019.
- Knowledge centre:
- Jalan Committee report on RBI's ECF - In 2019, the RBI accepted the recommendation of Jalan Committee. Major recommendations were on risk provisioning and surplus distribution. (i) RBI’s economic capital - The Committee wanted continuation of the various reserves, risk provisions and risk buffers maintained by RBI. It wanted a clearer distinction between the two components of economic capital (realized equity and revaluation balances). Revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable. (ii) Risk provisioning for market risk - The Committee wants adoption of Expected Shortfall (ES) methodology under stressed conditions (in place of the Stressed-Value at Risk) for measuring the RBI’s market risk. (iii) Size of Realized Equity - The Committee recognized that the RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a ‘rainy day’. This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB) and can be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet, comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks. (iv) Surplus Distribution Policy - The Committee wants a surplus distribution policy which targets the level of realized equity to be maintained by the RBI, within the overall level of its economic capital vis-à-vis the earlier policy which targeted total economic capital level alone. Only if realized equity is above its requirement, will the entire net income be transferable to the Government. If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government.
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