Even though income fell 10.96%, expenditure decreased by a whopping 63.10% enabling RBI to provide this bonanza
By NR Bhusnurmath
Early last week, the Centre received an unexpected bonanza from RBI. After finalising its accounts for the nine-month period ending March 2021, RBI announced its decision to transfer a surplus of Rs 99,122 crore, 73.5% up from Rs 57,128 crore transferred the previous accounting year ending June 2020 (and Rs 53,511 crore budgeted for FY22) to the exchequer.
Ever since, speculation has been rife about the factors responsible for the sharp increase. Remember, this is the second-highest transfer ever, barring FY19 when RBI transferred Rs 1.76 lakh crore, following the recommendations of the Bimal Jalan committee regarding transfer of excess reserves. In the absence of complete details (the RBI press release announcing the decision contained no details), observers had to be content sparring over the likely candidates: gains from RBI’s dollar sales and OMOs (other income) and interest income due to higher holding of G-secs, driven in part by higher borrowing by the government.
With the release of RBI’s Annual Report 2020-21 on May 27, we finally got the answers. And, here’s the surprise! While the two main contenders mentioned above have no doubt contributed, the biggest reason for the sharp increase in surplus is sharply lower provisions. As a result, even though income fell 10.96%, expenditure decreased by a whopping 63.10% enabling RBI to provide this bonanza to the government.
Now, for the details. RBI reports its income in two broad two categories—Interest Income and Other Income. While interest income for the nine months ended March 2021 was lower by Rs 40,276 crore, ‘Other Income’ increased by Rs 23,876 crore, resulting in a fall in total income of Rs 16,399 crore. The main heads of account contributing to the increase in the Other Income are ‘Exchange gain/loss from Foreign Exchange transactions’, ‘Profit/ Loss on sale and redemption of Foreign Securities’ and ‘Profit/Loss on sale of Rupee securities’, which increased by Rs 20,636 crore, Rs 4,610 crore and Rs 3,942 crore, respectively. Exchange gain/ loss from forex transactions, are the fallout of rupee depreciation; when RBI sells dollars, it sells them at current rates and books profits since the cost of acquisition of these dollars is taken as the weighted average historical cost.
However, the fall in total income has been more than compensated by a dramatic fall (63.10%) in expenses on account of a sharp fall in ‘Provisions’. Provisions are 60.65% of total expenditure for the nine months ended March 21 as against 79.55% of the total expenditure for the year ended June 2020.
The reason for this can be traced to the Jalan committee recommendations on the RBI’s Economic Capital Framework. Based on its recommendations, RBI has been making provisions (mainly to its ‘Contingency Fund’) as a percentage of the balance sheet size. For the nine-month period ended March 21 provisions are Rs 20,710 crore compared to Rs 73,615 crore for the year FY20, i.e., a reduction of Rs 52,905 crore. The lower amount is explained by the much smaller increase in the balance sheet during the year ended March 21 (7%) vis-à-vis the previous year (30%). As a result, the increase in the Contingency Fund is Rs 20,508 cr as against Rs 67,690 crore in FY20.
Going forward, if RBI is compelled to increase the size of its balance sheet as part of its ‘quantitative easing’, this comfort may not be available in the current fiscal. But for now, government has reason to thank RBI for coming to its rescue at a time when its finances are looking increasingly threatened on account of the pandemic that shows no sign of letting up.
The author is Adjunct professor, IMT Ghaziabad