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How must govt use RBI's Rs 1.76 lakh crore

By Prasanna D Zore
August 30, 2019 10:59 IST

'Devote these additional resources to increasing public investment in infrastructure, particularly in the Railways.'

Photograph: Shashank Parade / PTI Photo

Former Reserve Bank of India deputy governor Dr Rakesh Mohan (below) was the vice-chairman of the Bimal Jalan Committee on Economic Capital Framework that was formed by the RBI to suggest a transparent mechanism to govern the transfer of RBI's surplus income to the Government of India.

"This should instil a great deal of confidence in the country and the RBI," Dr Mohan -- now Senior Fellow at the Jackson Institute for Global Affairs, Yale University and Distinguished Fellow at Brookings India -- tells's Prasanna D Zore.


Did the Bimal Jalan Committee undertake any simulation to test the strength and durability of the Contingency Risk Buffer band?

The report contains all the details of the simulations undertaken. It is a strong technical report that needs to be studied carefully by all those interested in the subject.

Should the RBI have gone with staggered payout of its reserves to the government instead of lumpsum payment?

We had no view on that. That was up to the RBI Board. The calculations suggested that the Contingency Risk Buffer (CRB) should be maintained .between 5.5% and 6.5% of the RBI's balance sheet. The RBI Board seems to have decided to take the lower bound (of 5.5%) and is distributing the difference between the existing CRB of 6.8%.

What could be the advantages of making this payout at one shot?

That decision was made between the government and the Reserve Bank. As far as the (Bimal Jalan) committee is concerned we didn't have a view on that.

In some sense, this question needs to be asked to the Board members and the government.

As an economist, how would you want the government to make optimum use of the transfer that has come its way?

Funds are fungible, so in some sense it is not very useful to look at any particular revenue source. You can ask the same question as to how should they make use of GST revenues, income tax revenues, etc? In that sense, it is not very useful to ask that question.

If you look at the (Union) Budget as a whole and look at the expenditure budget of the Government of India and the revenues they have estimated, then obviously, if the revenues they (the government) had estimated are higher than what are being realised, then the RBI transfer will help in plugging the gap to meet the budgeted expenditures.

On the other hand, if they are getting revenues as they had expected, then this transfer would amount to additional revenue, and additional expenditures can be made.

If the latter is correct, my vote would be to devote these additional resources to increasing public investment in infrastructure, particularly in the railways.

One has to look seriously at the actual numbers, at the budget and expected revenue for the year.

Does the transfer evoke confidence among global economists about the way the Indian government is dealing with the economic slowdown by raising resources from RBI's surplus?

You would recall that the former chief economic adviser (CEA), Arvind Subramanian, in the Economic Survey of 2015-16, and in his book (Of Counsel: The Challenges Of The Modi-Jaitley Economy) that he wrote after he left the position of the CEA, mentioned that the (RBI's) excess reserves were somewhere between Rs 4.5 lakh crore and Rs 7 lakh crore, which needed to be transferred to the Government of India.

The number for the RBI surplus that has now come out (as per the calculations of the Bimal Jalan Committee reportI) is about Rs 50,000 crore. The Contingency Risk Buffer before this transfer stood at 6.8% of the total RBI reserves. This Rs 52,000 crore (that will be transferred to the government) amounts to 1.3% of the (RBI's) balance sheet.

In that context, the Jalan Committee has now provided very clear guidelines on how the (RBI's) balance sheet should be looked at, what kind of disclosures should be made, what are the principles on which the Contingency Risk Buffer should be maintained, what should be the revaluation reserves, and the market risk to the Contingency Risk Buffer.

Given the kind of discussions that were going on before the Jalan Committee was appointed, and on which, among other issues, Dr (Urjit) Patel (the former RBI governor) resigned, it was imperative that confidence be provided, both domestically and externally, on the integrity of the RBI.

The appointment of the committee itself demonstrated within the country and across the world that the Reserve Bank and the government wanted to arrive at a rational conclusion on the issue. 

The Bimal Jalan Committee has given a very clear and analytical report giving information on practices around the world, on the simulation exercises, stress-testing, etc, that it undertook, and has provided a completely transparent mechanism that should now govern the transfer of RBI's reserves to the government for some years to come. This should instil a great deal of confidence in the country and the RBI.

Is it not being interpreted as an attack on RBI's autonomy?

I would have thought the opposite! I just explained that the in the earlier discussion starting from the Economic Survey (of 2015-16), and later pushed by the government as well in the Reserve Bank Board last year, there was an expectation that the RBI would have to transfer between Rs 4.5 trillion (lakh crore) and Rs 7 trillion to the government.

The fact that the government and the Reserve Bank Board have accepted the report of the expert committee in toto would suggest that basically the Reserve Bank and the government are respecting the analysis of the Jalan Committee. The excess transfer is only of the order of 1.3 percent of the balance sheet and around Rs 0.5 trillion (Rs 50,000 crore). So the issue of (attack on) RBI's autonomy has now been settled.

Given the controversy surrounding the RBI transferring the money from its reserves to the government, one would want to understand how does the government benefit from the transfer. You too have been on record saying that it would have been prudent if the Contingency Risk Buffer were set at 6% instead of the 5.5% set by the RBI Board.

That's my judgement. The RBI Board, in its wisdom, obviously arrived at a different judgement. But that did not violate the lower bound, and we had given a lower bound (of 5.5%). That decision was made by the RBI Board and this question should be asked to them and not me.

They have completely adhered to the recommendations we made in the report but I have said that, in my personal opinion, it would have been prudent for the (RBI) Board and the government to have pegged the lower bound at 6% or a little higher. As it happens, this year, that is in 2018-19, the surplus with the RBI is higher than usual. They could have taken this higher than usual surplus into account and maintained a higher buffer.

They could have said, 'Look, we have got the surplus higher than usual. And therefore, we need to maintain a (higher) buffer for next year'.

The RBI balance sheet was expanding at roughly the same rate as nominal GDP over the last 10 years, at around 10% plus. So, one can expect the RBI balance sheet to again increase by something like 10% for the next fiscal year. What this means is that, because they are at the lower end of the buffer, there is no cushion available for next year.

This means that given that it's (the Contingency Risk Buffer of 5.5%) at the minimum today, and to maintain the minimum (Contingency Risk Buffer of 5.5%) next year, the Reserve Bank would have to retain part of the surplus that is generated next year to make sure that the buffer is at the lower bound of 5.5%.

And if the growth is something around 10%, it would mean that somewhere around Rs 20,000 crore will have to be retained from the annual surplus next year, which would mean a significant fall in the surplus transferred to the government. And so, I think that would have been a more prudent thing to do but then it is the collective judgement of the RBI Board.

Is the lower bound of 5.5% as the CRB fixed by the RBI Board adequate to ring fence the Indian economy in case we face a 2008-like financial meltdown or if there were a run on the Indian rupee?

That's what the Jalan Committee has arrived at (after simulating for financial emergencies and doing several stress-tests). You must read the report!

Could there have been any pressure on the RBI Board to fix the lower bound of 5.5% for the CRB given that there were two government nominees on the RBI Board?

That is the discussion between the RBI Board and government, which I am not privy to.

One would want to understand the actual surplus reserve that the RBI generates because the former CEA Arvind Subramanian had arrived at a wide range of Rs 4 lakh crore to Rs 7 lakh crore and now the Bimal Jalan Committee has pegged the figure at Rs 50,000 crore?

And how much of it should/could be considered financially prudent to be transferred to the government?

Everything is answered in the report. You really need to look at the report. 

The report has clearly outlined what the risk buffer ought to be. It is divided into two parts (Currency and Gold Revaluation Account and Contingency Fund), and given a clear view that no disbursement can be made from revaluation reserves (CGRA).

(Former CEA) Arvind Subramanian had opined that revaluation reserves too could be disbursed. But there is clear view in the report (submitted by the Jalan Committee) that it should not be done.

According to standard accounting practices, one has to also factor the market risk (associated with transferring money to the government out of the CGRA). All this is mentioned in black and white in the (Jalan Committee) report.

You really need to read the report.

Photograph: Reuters

Prasanna D Zore /