Most countries have a central bank, an authority which is usually independent that manages the country’s currency, the supply of money, interest rates, etc. In India, this is the Reserve Bank of India (RBI), which is the organisation that prints money, and is a banker for the government itself. It receives and makes payments on behalf of the government, and also raises money. It also manages the banks in the country, to ensure that they don’t step out of line. However, while it is fully owned by the Government of India, it is an independent authority.
Why does it pay the government? The RBI operates on the Reserve Bank of India Act of 1934, and one of the sections in this Act states that any profits it makes after all its expenses and provisions are taken care of, will go to the Centre.
Where is this profit coming from? The RBI earns money through a variety of things — government securities it has purchased and sold, interest it has earned on money lent to banks, investment in foreign currency and assets, etc.
It also has certain mandated things it holds money for — a reserve. The RBI has four of these — a contingency fund, asset development fund, currency and gold revaluation account, and investment revaluation account.
The RBI transfers money to the government and this has not been under question. How much, however, has been a bone of contention between the two. The government believes that the RBI’s reserves are way more than it needs, and has asked the RBI multiple times to part with more money which could be put to use rather than just being parked somewhere. This has led to a spat between the two, and this friction between the two institutions over a variety of issues, including the independence of the RBI, led to the resignation of RBI Governor Urjit Patel in December 2018.
After this, a committee was formed headed by Bimal Jalan (former RBI Governor) to look into how much reserves the RBI should hold, among other things.
The RBI’s Central Board announced on Monday that it was transferring Rs 52,637 crore of excess risk provision and a surplus of Rs 1,76,051 crore from the 2018-19 financial year. Way more than it got earlier.
This risk provision is the contingency fund — for a contingency or any risk that may arise. There is a certain percentage of the balance sheet that it is required to keep, to ensure that it is able to control any untoward situation that may arise. The Bimal Jalan panel decided that this must be between 5.5-6.5% of the balance sheet. As per the RBI, this was higher — at 6.8%. On Monday, after accepting the committee’s recommendations, the RBI then decided to go with maintaining this amount at the lower limit of 5.5%, which meant that as opposed to what the RBI previously held, it now freed up money — Rs 52,637 crore, to be transferred to the Centre. This is money the government needs.
The government had also reportedly earlier asked for a cut from the revaluation funds — revaluation assets that are undervalued on the bank's books, which can be relied upon during times of unexpected losses. The Bimal Jalan committee, however, said that this has to be left intact.
Other than the Rs 52,637 crore, the panel recommended that the RBI’s entire net income (which is the income after all expenses have been deducted, called the surplus or dividend) of Rs 1,23,414 crore for the year — to be transferred to the government.
Usually, a company distributes the dividend to its shareholders on earning a profit. However, since the RBI isn’t a company, the excess amount is the income it has after all its expenses. This surplus is usually given in early August. The RBI’s financial year runs from July 1 through June 30, while the government’s financial year runs from April 1 to March 31.
Of the Rs 1,23,414 crore surplus, the RBI said that it had already given Rs 28,000 crore in February as an interim dividend — money which is distributed before the final earnings are computed. In this case, since the government’s financial year ends earlier, the money was given to the Centre, which helped fund things it needed to. The interim dividend was one of the issues over which Urjit Patel resigned, and the current RBI Governor Shaktikanta Das, has agreed to loosen the purse strings.
While there are speculations regarding what it will use this Rs 1.76 lakh crore for, the government is keeping its cards close to its chest. On Tuesday evening, Finance Minister Nirmala Sitharaman said that they hadn’t decided on the deployment of funds. There are speculations, however, that it may use this to fund the shortfall of expected tax revenues, or to infuse money into public sector banks as promised by the Finance Minister.