Gift from RBI: Government should use RBI funds in a prudent manner

Context:             

• On Monday, the reserve bank of India transferred a surplus of 1.76 lakh crore to the government.

• The surplus reserve has been granted following the recommendations by Bimal Jalan committee.

• The total amount is constituted by a contingency reserve of Rs 52.63 thousand crores and a dividend of Rs. 1.23 lakh crore.

The Bimal Jalan Committee:

• The Bimal Jalan Committee is an expert committee constituted by RBI and led by the former RBI governor Dr Bimal Jalan.

• The committee was assigned with the task to suggest guidelines on how the RBI can transfer its surplus to the government. It formulated a revised economic capital framework to provide related guidelines. 

• The committee recommended that the realised equity (made up from retained earnings) could be utilized to meet the risks and losses. But revaluation reserves (the reserves which are built up from the revaluation of undervalued assets) can be used to meet only the market risks.

How does the RBI accumulates money?

• The chief function of RBI is to manage the borrowings of the central and state governments. Payment systems and Banks are also regulated by the RBI.

• The returns earned from the foreign currency assets constitute a major portion of RBI’s income. Additionally, it can make profit from earning interest on government bonds and securities.

• The RBI reserve holds three kinds of funds namely: the Currency and Gold Revaluation Account, the Asset Development Fund and the Contingency Fund.

The relationship between RBI and the government:

• The RBI functions as an advisory body to the government and not directly owned by it. 
• The Reserve Bank of India Act, 1934 specifies under article 37 that the central bank would allocate its surplus (which is income minus expenditure) to the government. 

What’s the fuss about?

• The RBI reserves are not designed to facilitate the government to help meet its expenditure. The reserves are the product of saving of many decades to tackle extreme situations like a financial crisis. 

• Further, the amount of transferred surplus this year is over double of the same in the previous year.

Conclusion:

• The transferred surplus will give a shoulder room to the government which has so far been unable to gain sufficient tax revenue in a struggling economy. On what purpose will the surplus be used is still not clarified by the government. 

• The role of the reserve bank is has been of concern as the whole transaction puts the autonomy of the bank in a vulnerable position.

• This year’s transfer from the Contingency Fund has lowered the buffer for excess transfer of provisions next year. How the transferred funds are used will be critical for the economy.