Interim relief

RBI's payout will help the govt

In its latest board meeting on Monday, the Reserve Bank of India (RBI) decided to transfer an interim dividend of Rs 28,000 crore to the government in the current fiscal year. Together with the Rs 40,000-crore final surplus share for 2017-18 (India’s central bank follows the July-June cycle), which the Centre received in the first half, the dividend transferred by the RBI to the government in 2018-19 has gone up to Rs 68,000 crore. This is substantially higher than the Rs 50,000 crore it got from the RBI in 2017-18. The higher amount would surely come as a big relief for the government for achieving its fiscal deficit target of 3.4 per cent in the current fiscal year at a time when there are concerns over lower than expected revenue collection especially via the goods and services tax (GST) route as well as the increased demands for public sector bank recapitalisation.

It’s clear the government is depending on the RBI’s largesse. For instance, in the interim Budget, presented at the start of the month, the finance minister revised the dividend from the RBI, nationalised banks, and financial institutions from Rs 54,817 crore to Rs 74,140 crore for FY19. For the next fiscal year, the government is seeking Rs 69,000 crore as dividend from the central bank, which is about 83 per cent of the combined dividends of Rs 82,911 crore the Centre has budgeted from the RBI, state-owned banks and financial institutions. The RBI, too, seems to be playing along, as is evident from the generous payout this year. The practice of interim dividend, in fact, started under former RBI governor Urjit Patel when the central bank paid Rs 10,000 crore on this account last year.
 

The welcome sign is that the interim dividend decision by the new governor is based on a limited audit review and after applying the extant capital framework. It shows the government has stayed away from pushing the RBI to touch its reserves — an issue that had snowballed into a major crisis between the government and the central bank. The RBI’s argument that time was that the bulk of the excess reserves it accumulated each year as a result of interest income as well as seigniorage, or the profits earned by issuing the currency, should be left with it as contingency funds to ensure financial stability in the economy. But the government reckoned that the central bank did not need to have about 27 per cent of its assets as capital and reserves. This led to a friction between the two.

That question should hopefully end after the expert committee, headed by former governor Bimal Jalan, gives its report next month. The committee, which will review the extant economic capital framework, will suggest how the central bank should handle its reserves and whether it can transfer its surplus to the government. It is also expected to look into the adequate level of risk provisioning the RBI needs to maintain. That apart, any other related matter, including treatment of surplus reserves created out of realised gains, will also come within the ambit of this committee. The government should take action on the recommendations quickly to signal an end to the long debate.