The RBI has played the perfect Santa, agreeing to write a huge cheque bearing Rs 1.76 lakh crore to the government.
The proposed transfer, which experts believe will come within this fiscal as a one-time transfer simply because it's nothing but dividend income. Importantly, the Bimal Jalan panel recommendations consigned overt concerns about 'raiding the central bank's revaluation reserves' to dust.
Now that the government can officially dig into the freshly discovered bonanza, and with more coming in next year and thereafter, the million-dollar question is where and how will the money be spent?
"Any dividend income to the government will be transferred as cash and within this year. The government had budgeted Rs 90,000 crore from RBI and financial institutions, but will now get more. These are additional reserves flow and will naturally help in government's fiscal management," R Gandhi, former Deputy Governor, RBI told Express.
He added that the Jalan panel's surplus distribution policy is scientific than the prevailing methodologies. "For the first time, the committee recongnized the standard principles of how the central bank's balance sheet should be managed. That unrealised gains shouldn't be touched at all and transfers can only be from realised earnings is a welcome move," he explained.
According to Economist Karan Bhasin, the transfer would be considered as current revenue for the government and won't have riders on how and where it should be used. "Now, there are two situations. First is that the government decides to spend all of it and there's a tax shortfall in which case the deficit increases. This is highly unlikely given that the government really is serious with respect to fiscal consolidation. The second situation is that a part of it is used to meet whatever tax shortfall is there while the rest is used for the bank recapitalization," said Bhasin.
What everyone agree is that the Rs 50,000 crore identified as excess reserves will give a leg up to liquidity, and strengthen the financial sector, specifically banks and NBFCs. "Given, the entire amount will come in at once, government expenditure is unlikely to be curbed given tax revenues will be lower due to lower growth rates. Ideally, investment spending should be the immediate focus at the moment," explained Bhasin.
Government sources also indicated that some of the windfall gains could be used towards capital expenditure, though there's no official word yet. But others like Suyash Choudhary, Head – Fixed Income, IDFC AMC, warn that the government should use them judiciously, to make the budget math sound credible.
"So far, any hope of meeting budget targets rests on a similar expenditure compression as that undertaken last year including via moving some items of spending ‘below the line’. Any temptation to use this amount towards a ‘fiscal stimulus’ risks regenerating worries around the quality and effectiveness towards meeting the deficit targets," he observed.
Given that the government got the bounty it badly wanted, don't pull out the confetti yet, as future transfers are unlikely to match the substantial jump seen this fiscal. For one, rbi's FY19 income is higher than the previous years largely due to the central bank's open market operations, currency swaps and others.
"From now, every year rBI will apply the surplus distribution formula to determine what's transferable to the government. In no fiscal, the number will be exactly the same as the absolute income figure will be based on that year's financials. What we can't say is if next year, the dividend will be more or less than the current year," reasoned Gandhi.
Overall though, the recommendations lend credibility to India’s policy framework and restore institutional independence of the central bank.
Nuts & bolts of Rs 1.76 lakh crore
The Rs 1,76,051 crore comprises two components. While Rs 1,23,414 crore is surplus income earned during FY19, Rs 28,000 crore has already been paid as interim dividend. It means the remaining Rs 98,414 crore will be paid out as dividend income.
Besides, the committee also identified Rs 52,637 crore as excess provisions as per the revised Economic Capital Framework (ECF), which too will be transferred to the government. Together, the total outgo from RBI coffers will be to the tune of Rs 1.48 lakh crore. This is Rs 60,000 crore (0.3 per cent of GDP) higher than the budgeted Rs 90,000 crore dividend income from Rbi and financial institutions for FY20 and will assuage worries about fiscal slippages.
"We estimate that the FY20 fiscal deficit target faced a slippage risk of 0.5 per cent of GDP on ambitious tax targets. As most of the excess revenue is likely to be used to contain any fiscal slippage in FY20, room for fiscal stimulus remains limited, in our view. On the margin, as the excess capital transfer would happen only in FY20, some market participants may be concerned about fiscal pressures in FY21," said Anubhuti Sahay, Head, South Asia Economic Research (India), Standard Chartered Bank, India.
The six-member panel -- led by former RBI Governor Bimal Jalan besides another high-profile former central banker Rakesh Sharma, two government representatives and two RBI board members -- was constituted in late December 2018. It was tasked with three key responsibilities: assess RBI’s economic capital framework, evaluate whether RBI was holding excess capital after factoring inadequate risk provision and recommend a surplus dividend distribution policy to the government.
The report was expected by April 2019, but was delayed multiple times and even saw the replacement of one government nominee -- Subhash Chandra Garg, who differed with the panel's view and had repotedly wrote a dissent note. Garg left the finance ministry in disfavour, while Rajiv Kumar, Secretary, Department of Financial Services filled in for Garg subsequently.
Critics feared that transfer of excess revaluation reserves estimated at Rs 6.9 lakh crore as on June 2018, is akin to raiding the central bank's balance sheet. Putting numbers to guesswork, this excess swung to as steep as Rs 3.6-4 lakh crore.
This isn't the first time such expert opinion was sought. At least three committees, set up in the past two decades, made different suggestions, but none were implemented.
For instance, in 1997, an internal group led by V Subrahmanyam recommended that Contingency Reserves should be built up to 12 per cent of total assets, while the Usha Thorat Group in 2004, suggested 18 per cent. In June 2013, the Y H Malegam committee, recommended adequate amount of profits to be transferred each year to contingency reserves, without actually defining 'adequate' as it was considered a policy matter and to be determined based on circumstances by the management.
It, however, noted that the Rs 6,505 crore-capital and reserve fund was 'wholly inadequate' to RBI's total assets of Rs 22 lakh crore as on June 2012, while contingency reserves aggregating Rs 1.9 lakh crore needed to be bumped up considering the small size of capital and reserve fund.
The Malegam committee was decisive about the unrealised gains and losses on the translation of foreign assets and the marketing of investments to market. "Such unrealised gains are not available for distribution as a dividend," it noted.
However, many central banks provide for a specified percentage of profits to be transferred to reserves before dividends are paid to the government like France, which allocates 5 per cent of net profits to be statutorily transferred to reserves.
As on June 2018, RBI had total assets worth Rs 36 lakh crore, while its reserves stood at Rs 9.6 lakh crore including contingency fund worth 2.3 lakh crore, and the currency and gold revaluation fund aggregating Rs 6.9 lakh crore.
In 1998, RBI adopted V Subrahmanyam group's recommendation to achieve contingency reserves at 12 per cent of total assets by 2005. However, barring four years, i.e., FY02, FY03, FY09 and FY10, when reserves stood at a kissing distance of 11.7, 11.7, 11.9 and 11.3 per cent of total assets respectively -- missing the 12 per cent band by a whisker -- the remaining 16 years, it was below and around 10 per cent.
Many central banks hold anywhere between 2-3 per cent of total assets as a contingency fund, while RBI's stands at 7.05 per cent.