In its bid to arrest slowing economic growth, the Reserve Bank of India (RBI) board Monday approved the transfer of a record-high surplus reserve of Rs 1.76 lakh crore to the government after approving all the recommendations of the Bimal Jalan committee. The surplus transfer, which is 1.25 per cent of the GDP (2018-19), comprises Rs 1.23 lakh crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting.
Amid mounting criticism from the opposition, Dr Rakesh Mohan, the vice-chairman of the Jalan committee and former deputy governor of RBI in an exclusive interview with India Today TV Executive Editor Sahil Joshi enunciates that the RBI by law is required to transfer its large surplus to the government articulating that it would have been prudent for the RBI board to opt for higher risk reserves. Dr Mohan also advises the government to utilise this amount for building infrastructure.
Excerpts from the interview:
Opposition parties are calling this transfer of surplus unprecedented. In your opinion, is it unprecedented or normal?
The key decision taken by the Jalan committee which is consistent with the standard accounting practices is that the revaluation reserves can't be disturbed.
Now, what remains is other contingency buffer and through all the calculations which are detailed in the main committee report, it needs to be maintained at 5.5% to 6.5% of the balance sheet. As the current levels of 2018 balance sheet came to 6.8%, the RBI board which also had two government nominees decided that it wants to maintain it at 5.5%. As a consequence, 1.3% of the balance sheet which came to around Rs 52,000 crore, therefore, was decided as excess reserve which was then transferred to the government.
This indeed is much higher than the previous years' surplus reserves. Though I haven't had the opportunity to look at the accounts, my assumption is that this is very high because in the past year (2018-19), the RBI had a very little accretion to foreign exchange reserves because there was no capital inflow after accounting for the current account deficit (CAD). Therefore, in order to inject liquidity as a part of the policy mandate of keeping adequate liquidity, the RBI bought almost 70% of the total government borrowings last year.
As a consequence of this, the stock of domestic government securities went up significantly. These securities have interest rates of 7 to 7.5% etc whereas the foreign securities have the same at 1 to 2%. Hence, the income from government securities has gone up significantly. Thus, I presume that the surplus for this year was much higher. In addition, the RBI also gave Rs 28,000 crore worth of interim dividends which went to the last year's budget. Meanwhile, out of Rs 1.25 lakh crore, Rs 95,000 will be demitted this year. The Budget for the year 2019 has already accounted for Rs 90,000 crore of this amount, so, in my sense, it is not a great addition except for the Rs 52,000 crore that has come out of Jalan committee's recommendation.
But if you compare this year's transfer with previous years', can it still be called unprecedented ?
It is a surplus. If a company makes large profits, it gives out large dividends . The RBI has a large surplus and by law it has to transfer the excess amount to the government. The apex bank has no choice and also it did not have to make any provisioning, because provisioning was according to the formula higher than what is required. While the total transfer in 2018-19 was Rs 68,000 crore, it was Rs 40,000 crore in August last year with Rs 28,000 crore as dividend payouts. With the total transfer being Rs 90,000 this year, I presume there would not be any interim dividend announcement, so it is not that big an increase.
It seems earlier RBI governors opposed to this idea. Was the entire committee unanimous in its decision on surplus capital even now? There were reports that the government wanted a higher amount.
During Raghuram Rajan's term, there was 'Malegam' committee report which also came to the conclusion that the RBI had somewhat excess reserves. The decision then was taken that the RBI would transfer 100% of its surplus for 3 years. But then, Dr Urjit Patel resigned. Also, the demand the government was making was much higher and if you recall, some absurd numbers like Rs 3 lakh crores of excess reserves were quoted in the media. But, now that the Jalan committee report is out, the panel has made very careful calculations, what the risk provisions need to be. And, we have cleared the confusion that the risk buffer should be between 5.5 to 6.5%.
Had the RBI board decided to adhere to the upper bound that is 6.5%, the transfer would have been very nominal. Hence, in my view, it would have been prudent to take a higher risk reserve of 6% as opposed to 5.5% given that the surplus was so high for the board and for the government.
For the next year (2020-21), the RBI will have to make provisions from whatever surplus it will get to maintain a lower bound rate of 5.5% assuming the RBI balance sheet expands 10%. The central bank will also have to add to the contingency risk buffer and my guess is that they will have to make provisions of Rs 25,000 crore next year, hence, it will have to reduce the surplus available to the government. The RBI should have chosen a higher bound rate so that it will not have to face any difficulty next year.
There is a conspiracy theory that this Rs 1.76 lakh crore is exactly the gap between the Budget and Economic Survey.
It is simply wrong to quote Rs 1.76 lakh crore figure. The Budget 2019 had already accounted for Rs 90,000 crore surplus transfer from the RBI which is just 5% higher than Rs 95,000 crore. Yes, Rs 52,000 crore is an addition, but the numbers which have been talked about earlier when former governors made those comments and I also made similar comments were because there have been talks about transferring around Rs 3 lakh crore which is an absurd number. But, after what the Jalan committee recommended, my guess would be that the former governors- Dr Rajan and Subbarao will appreciate what has been recommended.
Where will all the surplus capital be utilised by the government? What is your advice to the government?
In my view the extra revenue the government is getting should be used in infrastructure so that we can actually invest in the growth and future and make the economy more efficient by having efficient infrastructure, particularly in railways.
Can we say that even after transferring money from its contingency funds, RBI has funds to take care of its stability?
Absolutely it has, according to the calculations we made that the 5.5% of balance sheet contingency reserve buffer plus the reserves provide adequate risk security to the bank. However, earlier my preference for the government would have been not to go down the lower bound or the RBI board to keep it at 6-6.5% but that is a matter of choice. But, it is certainly in the range the Jalan committee has recommended.