The independence of RBI has been under question for a while now with two high profile resignations in the span of one year allegedly due to a difference in opinion with the government. The most recent source of contention being the surplus fund transfer to the government.
On 26th August 2019 RBI made history by accepting the Bimal Jalan committee’s recommendation of transferring a record 1.79 crores to the government- the highest fund transfer yet. The surplus consists of Rs 1,23,414 crore for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) amounting to 1.25 percent of the GDP (2018-19). Of this Rs 28000 crore has already been paid to the government as interim dividend.
The Bimal Jalan committee is a six-member committee that was appointed on December 26, 2018, to review the economic capital framework (ECF) and determine the size of capital reserves of RBI. Prior to the RBI announcement, the government had estimated Rs 90000 crores as surplus and with the added increase the fund transfer amounts to 2.7 times more than any prior fund transfers. This windfall in RBI reserves is attributed to framework changes and open market operations.
While the surplus fund is much higher than what was estimated by RBI, it is much needed for the country- almost like a lifeline. It could help tide over the current slowdown that the country is facing. The excess funds can greatly make up for the shortfall in revenue collection. In addition, reducing the fiscal deficit would mean more funds would be available to the private sector. The government can take active steps to increase investment like the construction of roads and development projects which will automatically attract private investment and boost the growth of core industries like steel and cement. Infusion of cash into the economy will also lead to lower interest rates on loans which could bring back demand for housing which in turn would revive the real estate sector.
While the country might benefit from this huge surplus it seems like this is at the cost of the central bank. According to the Bimal Jalan committee report on the economic capital framework the amount to be set aside as contingency fund was revised to a range of 5.5-6.5 percent of the balance sheet. The contingency fund is created as an imprest account to meet some urgent or unforeseen expenditure of the government. The committee also recommended a surplus distribution policy which will further increase the amount to be transferred to the government but in turn, reduce the reserve that RBI can maintain.
Added to this is the fact that this increased transfers from the central bank can only be a temporary solution to the country’s economic crisis. In the long run, forcing the RBI to increase their surplus is not a solution as maintaining the reserves are also important in cases of any unexpected contingencies from the exchange rate operations and monetary policy decisions.
While it is certainly much needed it this time, it would be better if the government does not heavily rely on the central bank for funds as it reflects poorly on the government and -takes away the autonomy of RBI.
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