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The surplus transfer to the Central government from the RBI under Section 47 of the RBI Act, 1934, has often evoked scepticism and raised many questions on the amount being transferred. It is popularly held that the surplus amount received by Government of India from the RBI is meant to reduce the deficit of the government as it swells the non-tax revenue of the government.
Despite RBI’s record dividend transfer for FY24, the govt must avoid depending on such largesse
In 2023-24, a surplus aggregating Rs.2,10,873.99 crore or 0.6% of GDP was transferred as against Rs.87,416.22 crore or 0.3% of GDP the previous year. This is the highest ever in the history of the RBI, amounting to an increase of Rs.1,23,457.77 or 141.2% of surplus transfer during 2023-24 over the previous year.
In accounting parlance, surplus transfer is derived from the net income of the RBI which in 2023-24 amounted to Rs.2,10,877.99 crore (income minus total expenditure), from which Rs.4 crore was deducted as transfer of funds to the National Industrial Credit (Long Term Operations) Fund, the National Housing Credit (Long Term Operations) Fund, the National Rural Credit (Long Term Operations) Fund and the National Rural Credit (Stabilisation) Fund. In short, almost all the net income has gone to the government.
Two components of the foreign source of RBI income are interest income from foreign securities and net interest and repo /reverse repo transactions, which recorded an increase of 49.66% and 129.12%, respectively
The total income of the RBI for 2023-24 has increased due to an increase in interest income contributed by foreign sources. According to the income statement for 2023-24, the total income aggregated Rs.2,75,572.32 crore, recording an increase of 17.04% over the previous year. Out of the total income, earnings from foreign sources was Rs.1,87,471.20 crore or 68.02% of the total income. The balance Rs.88,101.12 crore or 31.98% was from domestic sources.
The rate of earnings from foreign currency assets increased to 4.21% in 2023-24 as compared with 3.73% in the previous year. Furthermore, the interest income (both foreign and domestic) at Rs.1,88,605.73 crore accounting for 68.44% during 2023-24 witnessed an increase of 31.8%. The increase in interest income was mainly on account of foreign sources which accounted for 54.7% of the total income and recorded an increase of 71.1% during 2023-24. Two components of the foreign source of RBI income are interest income from foreign securities and net interest and repo /reverse repo transactions, which recorded an increase of 49.66% and 129.12%, respectively.
The reduction in risk provisions are in consonance with the Jalan committee as it is maintained at 6.50% of the balance sheet
The analysis of the expenditure by the RBI during 2023-24 showed that it decreased by 56.30%, mainly on account of risk provisions. This is not the RBI tightening its belt but the RBI accepting an exposure to higher risk. According to the RBI, a provision of Rs.42,819.91 crore was made and transferred to the Contingency Fund and no provision was made for the Asset Development Fund. These risk provisions are in terms of Section 47 of the RBI Act, 1934.
The fears that there will be such higher level of transfers as a pattern in the coming years are ill-conceived simply because the RBI may not have that much income, given that lower risk provisions on the expenditure front and higher interest income from abroad may not be a continuous process
These risk provisions, along with Capital and Reserve Fund, are components of the Reserve Bank’s Available Realised Equity (ARE) under the Economic Capital Framework (ECF) adopted by the Reserve Bank. The ECF was adopted by the RBI on August 26, 2019 based on recommendations of the Expert Committee to Review the extant ECF under the Chairmanship of former Governor Bimal Jalan.
The Bimal Jalan committee had recommended that the risk provisioning under the Contingent Risk Buffer (CRB) be maintained within a range of 6.5% to 5.5% of the RBI’s balance sheet. An amount of Rs.42,819.91 crore was also provided towards Contingency Fund to maintain the Available Realised Equity, ARE, at the level of 6.50% of the size of the balance sheet. Accordingly, the balance in the Contingency Fund as on March 31, 2024 was Rs.4,28,621.03 crore as compared to Rs.3,51,205.69 crore as on March 31, 2023.
New efforts are needed to enhance tax buoyancy and reprioritise expenditure
From the forgoing, we may conclude that firstly, the higher income was on account of interest income received from the foreign sources due to higher interest rate in USA and advanced economies. Secondly, the reduction in risk provisions are in consonance with the Jalan committee as it is maintained at 6.50% of the balance sheet.
The Jalan Committee set a band – from 5.5 % to 6.5% -- of the balance sheet. It might have been prudent for the RBI not to max out the dividend. However, this is what the RBI has done – it has given out the maximum it could while remaining within the bounds of the Jalan Committee recommendations. It has stretched while remaining within the letter of the Jalan Committee recommendations.
Assuming the all other receipts and expenditure remain the same at the interim budget level, the fiscal deficit and the revenue deficit will be placed at 4.8% and 1.7%, respectively, in the regular budget, which will be down from 5.1% and 2% in the interim budget
Yet, do note that the increase in the size of the balance sheet at 11.08% for the year ended March 31,2024 is in line with the increase in GDP at 10.5% during 2024-25. Thus, the contentious issue is not the surplus transfer per se but the impact of such transfers on the Union budget.
The budget for 2024-25 was an interim budget. A regular budget will hopefully be presented in July 2024. The Central government will then take into account in its dividend and profits account an amount of Rs.2,10,873.99, which is an astounding 0.6% of GDP. In the interim budget, the government has estimated surplus from RBI and other nationalised banks and other financial institutions at Rs.1,02,000 crore, which accounted for 0.3% of GDP. The increased surplus will increase the revenue receipt of the Central government by 0.3% of GDP.
The RBI is not a profit-making body but must only prudently manage the national accounts funds and reserves
Assuming the all other receipts and expenditure remain the same at the interim budget level, the fiscal deficit and the revenue deficit will be placed at 4.8% and 1.7%, respectively, in the regular budget, which will be down from 5.1% and 2% in the interim budget. The fears that there will be such higher level of transfers as a pattern in the coming years are ill-conceived simply because the RBI may not have that much income, given that lower risk provisions on the expenditure front and higher interest income from abroad may not be a continuous process.
Yet, there must be concerns on another front – one of which is the high transfers taking on a habit-forming role for the government and thus the temptation from the government and the pressure on the RBI to generate more to be able to transfer more.
RBI's considerations must necessarily be stability, safety and integrity in the face of rising geo-political complexities, which is a profile very different from a typical business
This may play out in the background, silently, and carries the potential of long-term negative fallouts since the RBI is not a profit-making body but must only prudently manage the national accounts funds and reserves – sometimes and often even at the cost of lower returns or indeed losses. Its considerations must necessarily be stability, safety and integrity in the face of rising geo-political complexities, which is a profile very different from a typical business.
Higher reliance on RBI’s surplus transfer is against the spirit of prudent fiscal management
In fiscal parlance, the budgetary operations as described above are termed “quasi-fiscal operations”. It would be imprudent for the government to depend on them. At present, the commitment of the government in the Fiscal Responsibility and Budget Management Act (FRBM), 2018, to reduce the Central government’s fiscal deficit to 3% of the GDP looks difficult to achieve. Therefore, new efforts are needed to enhance tax buoyancy and reprioritise expenditure. Higher reliance on RBI’s surplus transfer is against the spirit of prudent fiscal management.