Government should use RBI funds in a prudent manner
August 28, 2019 08:58 IST
Share Article
more-in
Reserve Bank of India
It is morally unacceptable that any one government can swallow even a part of such funds to help meet its expenditure in a particular year.
After a long tug of war, the government has eventually had its way with the Reserve Bank of India, managing to get it to part with a portion of its accumulated reserves. The RBI board, on Monday, decided to transfer a massive ₹1,76,051 crore to the government, including a sum of ₹52,637 crore from its contingency reserve built over the last several years. The outflow from the RBI’s reserves was limited to this amount only because the Bimal Jalan Committee, appointed to recommend the economic capital framework for the RBI, decided to keep a major part of the reserves locked up and out of the reach of the government while opening up the remainder with strict stipulations. The Committee has recommended, and rightly so, that the Currency and Gold Revaluation Reserve Account (₹6.91 lakh crore as of June 30, 2018), at least half of which was eyed by the government, represents unrealised gains and hence is not distributable to the government. In the case of the Contingency Reserve (built out of retained earnings), which was ₹2.32 lakh crore as of the same date, the committee said that it should be maintained within a band of 6.5-5.5% of total assets. It left it to the RBI board to decide the precise percentage it was comfortable within this band and transfer the excess to the government. As it happened, the board, in its Monday meeting, decided to peg this ratio at 5.5% thus enabling it to transfer a sum of ₹52,637 crore to the government immediately. The committee should also be complimented for clearly specifying that the revaluation reserve cannot be used to bridge shortfalls in other reserves.
  In principle, it could be argued that the government as sovereign owns the RBI and hence there is nothing wrong if it decides to tap the central bank’s reserves. Yet, that it actually chose to do so is unfortunate because these reserves represent inter-generational equity built up over several years by the RBI by squirrelling away a part of its annual surplus.
It is morally unacceptable that any one government can swallow even a part of such funds to help meet its expenditure in a particular year. The reserves, as the Jalan Committee has pointed out, represent the country’s savings for a ‘rainy day’, which is a monetary or financial crisis. Interestingly, the net surplus of ₹1,23,414 crore posted by the RBI in 2018-19 is more than double that of the previous year and is considerably higher than the ₹65,876 crore that it netted in 2015-16. Only the release of the RBI’s Annual Report in the next few days will help in the understanding of the reasons behind the sharp jump in the surplus. The big transfer from the RBI will free up the hands of the government at a time when tax revenues are undershooting the target by a long chalk. The money, it is hoped, will be put to use in a prudent manner.