The ECF panel was mandated to submit its report to the RBI within 90 days of its first meeting which took place on January 8.
The six-member Bimal Jalan Committee, which is reviewing the RBI’s Economic Capital Framework (ECF), met here on Wednesday and decided to huddle together once more shortly before finalising its report to be submitted to the central bank by month-end.
The finance ministry, which is staring at a likely big shortfall in FY20 revenue from the level envisaged in the Interim Budget — the ask rate for gross tax revenue is 23% — is keen that the ECF review results in a spike in receipts from RBI. The increase in welfare expenditure — thanks to the expansion of the PM Kisan income transfer scheme and the pension scheme being planned for unorganised-sector workers — from the budgeted level makes it even more important for the Centre to rely on higher transfers from RBI. Apart from the immediate need to boost receipts, a favourable review or ECF would also help the North Block in its medium-term fiscal consolidation plan.
Finance minister Nirmala Sitharaman will present the Budget 2019-20 in Parliament on July 5.
The ECF panel was mandated to submit its report to the RBI within 90 days of its first meeting which took place on January 8. Following this, the panel was given a three-month extension. Asked about the reason for delay in finalisation of the report, an official told PTI: “There may be differences of opinion, but that is being discussed.”
The Economic Survey 2015-16 suggested that the RBI’s capital (‘excess capital’) could be redeployed to infuse funds into state-owned banks and help them recognise losses on bad assets and step up lending; though the ministry has so far made no commitments on bailing out the NBFCs facing liquidity/solvency issues with capital infusion, it is aware that the demands for such a step might become louder in the weeks to come.
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 was of the view 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.
Many have, however, disagreed with this and said the perception that the RBI capital is in excess of what generally other central banks have is because of the amounts held in Currency and Gold Revaluation Account (CGRA). It has been pointed out by these circles that foreign currency assets, which are being held for precautionary purposes and without a commercial intent, are a major part of the central bank’s total balance sheet assets. While these assets are periodically revalued at market rates and the gains and losses are accounted for, any gains from such exercises are unrealiaed and notional. These, they reckon, cannot be counted as profits generated by RBI.
Prior to 2014, the RBI used to shift a part of its gross realised income to the two funds for meant for unexpected contingencies and internal capex needs and transfer only the net disposable income (NDI) to the government. However, between 2014-2016, acceding to the demands from a fiscally stressed government, the entire (realised) income sans transfers to the twin funds, was given to it; in 2017 and 2018, however, portions of the income got recognised an expenditure and only the balance got transferred to the government.
A report by Bank of America Merrill Lynch said the Jalan committee could identify an excess buffer of up to `3 lakh crore (or roughly 1.5% of the GDP), including the excess capital in contingency reserves and revaluation reserves. Halving of the contingency reserves of the RBI to a level of 3.25% from 6.5% at present will release `1.28 lakh crore, the report said while stressing that the level would still be 50% higher than what central banks of the BRICS nations have. Similarly, halving the yield cover hike to 4.5% from the current 9% will release another `1.17 lakh crore, it added.
In February, RBI decided to offer an interim dividend of `28,000 crore to the Centre, driving up its total transfer in the last fiscal to `68,000 crore, as estimated by the Interim Budget. The elevated transfer now 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 `40,659 crore (including an interim dividend of `10,000 crore in March 2018).
The other members of the Jalan panel include Rakesh Mohan, former deputy governor of RBI as the vice-chairman, finance secretary Subhash Chandra Garg, RBI deputy governor N S Vishwanathan, and two RBI central board members — Bharat Doshi and Sudhir Mankad.