RBI on 26th August approved the transfer of Rs 1.76 lakh crore dividend and surplus reserves to the government. This amount will help government in stimulating the slowing economy without widening fiscal deficit. The excess reserve transfer is in line with the recommendation of former RBI governor Bimal Jalan-led panel constituted to review the RBI’s Economic Capital Framework (ECF).
Background
There was a debate about how much surplus of the Reserve Bank of India (RBI) is to be transferred to the government of India. Current ECF is based on a conservative assessment of risk by the RBI which leads to unnecessary lock up of funds by the RBI.
Recommendations of the Bimal Jalan Committee
The RBI should maintain a Contingent Risk Buffer, which mostly comes from the CF, of between 5.5-6.5% of the central bank’s balance sheet. Since the latest CF amount was about 6.8% of the RBI’s balance sheet, the excess amount (beyond 5.5%) was to be transferred to the government (around Rs 52000 crore).
Impact
Way Forward
The government in its Budget already accounted for a transfer of 90,000 crore from the RBI, and so the unexpected amount is 86,000 crore. This is a one-time bonanza and does not fix the fact that tax revenues — both direct and indirect tax — are coming in much lower than they need to. So the need of hour is to reform conventional sources of funding such as increasing Tax Base, DTC reform and Tax to GDP ratio.