RBI ANNUAL REPORT. RBI’s surplus transfer to Centre up 63%

After denying the Centre of nearly Rs 35,000 crore in revenues last year, the RBI has offered some much-needed respite this year. The RBI’s annual report for 2017-18 reveals that higher income and a notable fall in expenses had led to a substantial increase in the surplus transferred to the Centre. From a Rs 30,659 crore surplus last year, the RBI transferred Rs 50,000 crore to the Centre this year, an increase of 63 per cent.

Given that dividends from public sector enterprises, the RBI, PSU banks and financial institutions constitute a chunk of the Centre’s non-tax revenues, it needs to be seen if the bump-up in surplus transfer from the RBI offers any relief to the Centre’s fiscal math.

For FY19, the Centre has assumed a tepid 3.8 per cent increase in non-tax revenues in the Budget, as receipts from dividends were kept flat. Windfall gains, if any, from other quarters − dividends declared by public sector companies − can also boost non-tax revenues. However, it is still the increase in indirect taxes that is critical to achieve the government’s FY19 fiscal deficit target.

Why higher surplus

RBI’s income increased by a healthy 26.6 per cent in 2017-18; it had fallen by about 23 per cent in the previous year. The main reason for the fall in income last year was the net interest on LAF (liquidity adjustment facility) operations slipping to a negative of Rs 17,426 crore. Banks flush with funds post-demonetisation lent to the RBI through the reverse repo option under LAF (aside from investing in government securities). The interest paid by the RBI to the banks under reverse repo in 2016-17 had eaten into its income.

In 2017-18, lower surplus liquidity in the banking system vis-à-vis the previous year led to a lower interest outgo for RBI under the reverse repo window. The RBI’s net interest income from LAF operations increased by about Rs 7,900 crore in 2017-18, though it was still at a negative Rs 9,541 crore owing to continuing interest outgo under reverse repo.

Alongside the increase in income, a significant fall in expenses also led to a surge in RBI’s net surplus. On the expenditure front, the cost of printing notes that had more than doubled in 2016-17 due to RBI’s remonetisation efforts fell notably in 2017-18. Supply of notes decreased to 25,003 million pieces in 2017-18, 14 per cent lower than in the previous year. With the cost of printing notes falling by 38 per cent in 2017-18, the overall expenditure shrunk by 21.6 per cent.

After a gap of three years the RBI has once again started transferring amounts to its contingency fund in 2016-17. This had cost the Centre an additional Rs 13,000-odd crore last year. Continuing with the trend, the RBI transferred Rs 14,190 crore in 2017-18 to the contingency fund. Despite this, the RBI’s net surplus increased by about Rs 19,300 crore in 2017-18, adding to the Centre’s coffers.

Fiscal math

In the 2018-19 Budget, the Centre assumed dividend/ surplus of RBI, nationalised banks and financial institutions to increase marginally to Rs 54,817 crore this fiscal from Rs 51,623 crore in the previous year. Hence, the sharp increase in surplus from the RBI could boost overall receipts under non-tax revenues, if there are positive surprises on dividends declared by public sector companies.

Of course, the crucial part in the Centre’s fiscal math is the expected uptick in indirect taxes − from about 9 per cent growth in FY18 to 19 per cent in FY19.