If the govt signed on to the Bimal Jalan report that resulted in it getting much less than the Rs 4 lakh crore it wanted, it suggests the report is technically sound
While RBI has, often enough, been blamed for not doing enough to lower interest rates or to keep the rupee weak, a brand-new critique emerged after the then chief economic advisor Arvind Subramanian’s Economic Survey in 2016. A section in the Survey had a table that calculated the amount of ‘excess capital’ the RBI had. As compared to a ‘median’ of 16% amongst various central banks, the Survey said the RBI’s capital was around 32% of the size of its balance sheet; this made the RBI an outlier, “second only to Norway (45%) and well above that of the US Federal Reserve and the Bank of England, whose ratios are less than 2 per cent”. The Survey never worried about the fact that some currencies, like the dollar, are international currencies – so where is the need for reserves with the Fed? – while the rupee is not; nor did it make any distinction between current-account-deficit and surplus countries. It did not bother to explain why, for instance, if 16% was the median, Hong Kong or the ECB’s capital was well over 20% of the size of the balance sheet; and, in the case of Russia, while the Survey first mentioned its equity as around 20%, this rose to around 35% in the next year’s Survey.
Subramanian’s Survey suggested RBI could return around Rs 4 lakh crore to the government and this money, it said, could be used to recapitalize bleeding PSU banks or maybe even write off government debt; in the latter case, there would be a Rs 30,000 crore or so saving for the government every year. For good measure, the 2017 Survey cited international precedents of central banks stepping up to the plate to help their governments, like, in 2015, the US Fed giving $19bn from its surplus capital to fund transportation projects in the country.
With such an endorsement by someone of Subramanian’s stature, the RBI’s capital attracted everyone’s attention like bees to honey. In all probability, the government’s decision to ask RBI for discussions on a variety of issues under Section 7 of the RBI Act – under this, the government can issue directives to RBI – was also driven by the need to get this money. The Section 7 consultation was a brahmastra never used before in independent India’s history, even when relations between the government and RBI were acrimonious; it was a low point in the way the government dealt with an institution which, though under its control, acted independently.
Fortunately, all of this is behind us. Instead of the polite slanging match this initially resulted in – then RBI Governor Raghuram Rajan said he was willing to give lessons in central bank balance sheets to whoever wrote that section of the Survey – and later even the resignation of Urjit Patel as Governor, the government decided to set up a high-powered committee under former RBI Governor Bimal Jalan. It had former deputy Governor Rakesh Mohan as its vice-chair and others members with good technical expertise like Bharat Doshi who used to be Group CFO for Mahindra & Mahindra.
Since the Jalan panel’s recommendation to give the government Rs 1.76 lakh crore in FY20 is around thrice that transferred in recent years, it is not surprising most – including opposition parties – have seen this as abject capitulation; a way to fund the budget deficit in a year when taxes are likely to fall short of the target by a big margin and in a year when the government desperately needs money to stimulate the economy.
Apart from the fact that the Bimal Jalan panel’s members don’t look the sort to compromise their integrity and professional standing, it is important to keep in mind that Rs 123,000 crore of the transfer is the RBI’s profit for the year, earned from its investments; the world over, central bank surpluses are transferred to the central government. If the Rs 53,000 crore of capital that has, in addition, been transferred to the government is considered to be abject capitulation, juxtapose this with the Rs 4 lakh crore that Subramanian suggested be given back by RBI.
But perhaps, as some suggest, now that the government has tasted blood, it can get the remainder next year or the year after? It does seem unlikely, though, given the Jalan panel has put in place certain norms for how excess capital is to be estimated. So, while the Survey wanted Rs 4 lakh crore from the RBI, as the central bank had pointed out at that point, the bulk of this capital was notional; about 70% of RBI’s reserves are ‘revaluation reserves’. So, if RBI bought a dollar at Rs 40 and that is worth Rs 70 today, Rs 30 is the ‘revaluation reserve’, but if this has to be given to the government, the RBI needs to sell the dollar first; ditto for RBI’s gold reserves whose value has shot up over the years.
After extensive technical analysis or stress-testing, the Jalan panel has estimated that RBI needs a Contingent Reserve Buffer (CRB) that is in the range of 5.5-6.5% of its balance sheet; the RBI’s Board decided to keep the CRB at 5.5% and that is where the Rs 53,000 crore to transfer to the government came from. So unless there is a sizeable increase in RBI’s balance sheet next year, there won’t be any transfer of capital. The panel has also made it clear that no notional reserves can be touched; they will only be considered when the profits have been realized; that is, when the dollars or gold have been sold and the profit booked in the RBI’s accounts. Similar analysis was done to arrive at the ‘economic capital’ the RBI needs, of between 20-24.5% of its balance sheet; right now, this stands at around 23.3%.
There will still be some who will argue the RBI doesn’t need this level of either contingent reserves or economic capital. But, at the end of the day, these are judgment calls that experts make, and this is what an expert panel has opined. And, as compared to just one person’s opinion – the Economic Survey – this report has been signed off by even the finance ministry which, till some time back, wanted around eight times the amount of money that has been transferred to it from the RBI’s capital; since there is no dissent note anymore, it suggests the finance ministry agrees with the rest of the panel.