The Hindu Editorials Notes (31st August 2019) – Mains Sure Shot

GS-3 Mains

Question – Analyse the recent transfer of funds from the RBI to the Central government and its implications. Why has it raised questions about the RBI’s autonomy? ( 250 words)

Context – the huge transfer of money from RBI to Central government.

Points to be kept in mind:

• Transfer of RBI surplus to the government – Forms part of government’s non-tax revenue.
• The transfer of RBI’s surplus to the government is not a new phenomenon. It happens every year towards the end of August. But it is the huge amount of surplus transferred this time that has generated debates about the RBI’s autonomy.

So what is the argument about?

• Two interpretations are being made:
• First is that the government being faced by a scarcity of resources needed to bring the economy on track has influenced the RBI to transfer some of its reserves to it. Now, if this has been done then it is not good for the economy because when we live in a globalised economy the uncertainty of being hit by a crisis increases. In which case the RBI may not have enough money to protect it. It also denotes an erosion of RBI’s independence.
• Second interpretation is that the central bank is a unique institution and it derives its supreme status over other banks by the confidence reimposed on it by the Central government. And therefore if there is a huge amount of cash lying idle with the Central Bank then it can be used more productively in the economy by the Central government and this time the Central government has done exactly this by following a due process after on the recommendations of the Jalan Committee.

Which of the narratives is true?

• The Economic Survey of 2016-17 found that the RBI is one of the most capitalised central banks in the world (i.e. it had a lot of money reserve compared to most other central banks in the world) and noted, “There is no particular reason why this extra capital should be kept with the RBI”. 
• It was roughly estimated that the excess capital of the RBI was around 4.5 lakh crore to 7 lakh crore.
• In this backdrop, the RBI, in consultation with the Central government formed the Jalan Committee to access the quantum (i.e. the extent of excess capital) of the RBI in the end of November,2019.
• The committee submitted its report on August 14. According to the accounts, the RBI has ended with an overall surplus of ₹1,759.87 billion in 2018-19 as against ₹500 billion in 2017-18, representing an increase of more than 250%.
• Now the question is what constitutes this surplus? Or what does this surplus money formed of?
• It is constituted/ consists of the money kept in the Contingency Fund (CF) and Asset Development Fund (ADF). CF means a reserve of money that is kept aside to deal with any unforeseen future circumstances. ADF means the reserve of money that the RBI keeps aside to for any internal capital expenditure and to invest in its subsidiary banks or associate institutions.
• Maintaining some Capital Reserve Buffer (CRB) is important to insure the economy against any tail risk of financial stability crisis. The Jalan Committee recommended that the CRB needs to be maintained at a range of 5.5 per cent to 6.5 per cent of the RBI’s balance sheet as on June 30, 2018.
• On the basis of this calculation the Jalan Committee recommended the amount of transfer of the RBI’s surplus to the government to be ₹1.76 lakh crore this year.

So is the second narrative right?

• First, the Jalan Committee comprising of the former RBI Governor Bimal Jalan and other experts have calculated the extent of excess capital of the RBI under a set of fairly standard and conservative assumptions.
• Second, at this juncture of the Indian economy — when the spectre of a slowdown is looming large and when channels of credit disbursements are choked because of a lack of capital with the commercial banks — a transfer of such additional money to the government could enable the government to go in for bank recapitalisation in a big way and would be good for the economy.
• Third, the transfer of the additional surplus from the RBI could enable the government to pursue efforts towards stimulating the economy while maintaining budget discipline.

Way ahead:

• The government while formulating any policy should carefully evaluate the consequences.

Note- one article also there.. we will update it tomrw