Centre wants to tap central bank surplus to cover outgo

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New Delhi | September 24, 2015 12:40 AM

Given the likely additional expenditure of R50,000-70,000 crore on salaries and pensions in FY17, the finance ministry wants the Reserve Bank of India...

RBI interest rateIn August, the central bank had transferred an all-time-high amount of Rs 65,896 crore, almost the entire surplus generated in 2014-15, to the exchequer. (Express Photo)

Given the likely additional expenditure of R50,000-70,000 crore on salaries and pensions in FY17, the finance ministry wants the Reserve Bank of India to transfer a record Rs 1 lakh crore from its surplus to the central exchequer.

This would require the RBI to dip into its accumulated internal reserves for the first time, besides shifting the entire surplus income in the current accounting year (July-June) to the Centre.

In August, the central bank had transferred an all-time-high amount of Rs 65,896 crore, almost the entire surplus generated in 2014-15, to the exchequer. In the previous year too, it had transferred the entire surplus (Rs 52,679 crore), against Rs 33,010 crore or 53% of the surplus transferred in the year earlier, owing to pressure from the government.

According to finance ministry sources, the RBI has over the years bolstered its internal reserves — these stood at a whopping Rs 2.43 lakh crore at the end of June 2015 — and is in a position to give additional support to the government, which needs to stick to its fiscal consolidation road map. The sources said the RBI has been told of this eventuality during recent discussions, but the central bank has shown reluctance to dip into its internal reserves, citing the risks involved. For instance, there could be losses if the rupee appreciates (the RBI books profits in its foreign currency assets when the rupee falls). Also, if any bank goes bankrupt, the central bank may have to absorb the liabilities, the RBI noted, although government sources say that any such problems faced by public sector banks would ultimately need to be tackled by the government.

“The wider the area of responsibilities of a central bank, greater the risks and, hence, higher the requirement of capital. A central bank may require recapitalisation precisely at a time when the fiscal position is under strain, say, due to a financial crisis. This strengthens the case for ex ante capitalisation of a central bank, rather than ex post recapitalisation,” the RBI said in its latest annual report. The RBI also feels that dependence on the government for capital could undermine its autonomy.

The Centre, however, wants the RBI to be more sensitive to its fiscal problems. In FY17, the award of the Seventh Pay Commission and the one rank, one pension policy for the armed forces could inflate the Centre’s salaries and pensions bill by around Rs 70,000 crore (the OROP implementation alone could need some Rs 12,000 crore).

Although subdued global commodities prices have helped reduce the subsidy bill, given that private investments have yet to manifestly pick up, the government needs to spend more to spur growth. Though this year’s fiscal deficit target of 3.9% of GDP appears achievable, it is going to be tough for the Centre to trim the deficit to 3.5% of GDP next year and further to 3% of GDP in FY18 as envisioned in the latest fiscal consolidation road map.

The RBI, being the bankers’ bank and the government’s bank, has multiple sources of income like the interest income from repo operations and the coupon payments being received for holding government securities. After administrative and operational expenses, which make only a small fraction of its income, a substantial part of the surplus is transferred to the government and the balance goes to the internal reserves.

Of the Rs 2.43 lakh crore internal reserves accumulated as on June 30, the Contingency Fund held Rs 2,21 lakh crore and the balance was the Asset Development Fund. Besides, the RBI balance sheet for 2014-15 also showed Rs 5.59 lakh crore in unrealised gains due to periodic revaluation of gold and foreign currency assets booked in the currency and gold revaluation account.

The RBI’s paid-up capital is Rs 5 crore as per Section 4 of the RBI Act, 1934. But unlike developed country central banks like the US Federal Reserve that are mandated to transfer most of their profits to the government, RBI Act stipulates that after making provisions for contingencies and corpus funds, the balance profit of the central bank is to be transferred to the government.

Reverse order:

* RBI transferred 99.99% of its surplus to the Centre in the last two years, quite higher than in previous years
* Finance ministry wants RBI to dip into its reserves—of about Rs 2.43 lakh crore—to transfer an even higher amount in FY17
* The central bank reluctant to drain its reserves; says it needs the comfort of higher capital to address risks and other eventualities

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