Decoding RBI’s surplus transfer to govt

The surplus transfer to the Central government from the RBI under Section 47 of the RBI Act, 1934, has raised many questions on the quantum of transfer.

It is popularly held that the surplus amount received by Centre from the RBI is meant to reduce the government’s deficit as it swells the non-tax revenue of the government.

In 2024-25, a surplus of ₹2,10,873.99 crore or 0.6 per cent of GDP was transferred as against ₹87,416.22 crore or 0.3 per cent of GDP the previous year. This is the highest ever in the history of the RBI, amounting to an increase of ₹1,23,457.77 crore or 141.2 per cent of surplus transfer during 2023-24 over the previous year.

In accounting parlance, surplus transfer is derived from the net income of the RBI which in 2023-24 amounted to ₹2,10,877.99 crore (income minus total expenditure), from which ₹4 crore was deducted as transfer of funds to the National Industrial Credit (Long Term Operations) Fund, the National Housing Credit (Long Term Operations) Fund, the National Rural Credit (Long Term Operations) Fund and the National Rural Credit (Stabilisation) Fund. In short, almost all the net income has gone to the government.

RBI’s total income for 2023-24 has increased due to a spike in interest income from foreign sources. According to the income statement for 2023-24, the total income aggregated ₹2,75,572.32 crore, up 17.04 per cent over the previous year.

Out of the total income, earnings from foreign sources was ₹1,87,471.20 crore or 68.02 per cent of the total income and the balance ₹88,101.12 crore from domestic sources.

The rate of earnings from foreign currency assets increased to 4.21 per cent in 2023-24 as compared with 3.73 per cent in the previous year.

Interest income

Furthermore, the interest income (both foreign and domestic) at ₹1,88,605.73 crore accounting for 68.44 per cent during 2023-24 witnessed an increase of 31.8 per cent. The increase in interest income was mainly on account of foreign sources which accounted for 54.7 per cent of the total income and recorded an increase of 71.1 per cent during 2023-24. Two components of the foreign source of RBI income are interest income from foreign securities and net interest and repo/reverse repo transactions, which recorded an increase of 49.66 per cent and 129.12 per cent, respectively.

The analysis of RBI’s expenditure in 2023-24 showed that it decreased by 56.30 per cent, mainly on account of risk provisions. This is not the RBI tightening its belt but accepting an exposure to higher risk.

According to the RBI, a provision of ₹42,819.91 crore was made and transferred to the Contingency Fund and no provision was made for the Asset Development Fund. These risk provisions are in terms of Section 47 of the RBI Act, 1934.

These risk provisions, along with Capital and Reserve Fund, are components of the Reserve Bank’s Available Realised Equity (ARE) under the Economic Capital Framework (ECF) adopted by the Reserve Bank.

The ECF was adopted by the RBI on August 26, 2019 based on recommendations of the Expert Committee to Review the extant ECF under the Chairmanship of former Governor Bimal Jalan.

Risk provisioning

The Jalan committee had recommended that the risk provisioning under the Contingent Risk Buffer (CRB) be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet.

An amount of ₹42,819.91 crore was also provided towards Contingency Fund to maintain the Available Realised Equity (ARE) at the level of 6.50 per cent of the size of the balance sheet.

Accordingly, the balance in the Contingency Fund as on March 31, 2024 was ₹4,28,621.03 crore as compared to ₹3,51,205.69 crore as on March 31, 2023.

From the foregoing, we may conclude that firstly, the higher income was on account of interest income received from the foreign sources due to higher interest rate in the US and advanced economies.

Secondly, the reduction in risk provisions are in consonance with the Jalan committee as it is maintained at 6.50 per cent of the balance sheet.

The Jalan Committee set a band — from 5.5 per cent to 6.5 per cent — of the balance sheet. It might have been prudent for the RBI not to max out the dividend. However, this is what the RBI has done – it has given out the maximum it could while remaining within the bounds of the Jalan Committee recommendations. It has stretched while remaining within the letter of the Jalan Committee recommendations.

Yet, do note that the increase in the size of the balance sheet at 11.08 per cent for the year ended March 31, 2024 is in line with the increase in GDP at 10.5 per cent during 2024-25. Thus, the contentious issue is not the surplus transfer per se but the impact of such transfers on the Union Budget.

The 2024-25 Budget was an interim budget. A regular budget will hopefully be presented in July 2024. The Centre will then take into account in its dividend and profits account an amount of ₹2,10,873.99, which is an astounding 0.6 per cent of GDP.

In the interim Budget, the government had estimated surplus from RBI and other nationalised banks and other financial institutions at ₹1,02,000 crore, which accounted for 0.3 per cent of GDP. The increased surplus will increase the revenue receipt of the Central government by 0.3 per cent of GDP. Assuming all other receipts and expenditure remain the same at the interim Budget level, the fiscal deficit and the revenue deficit will be placed at 4.8 per cent and 1.7 per cent, respectively, in the regular budget, which will be down from 5.1 per cent and 2 per cent in the interim Budget.

The fears that there will be such higher level of transfers as a pattern in the coming years are ill-conceived simply because the RBI may not have that much income, given that lower risk provisions on the expenditure front and higher interest income from abroad may not be a continuous process.

Yet, there must be concerns on another front — one of which is the high transfers taking on a habit-forming role for the government and thus the temptation from the government and the pressure on the RBI to generate more to be able to transfer more.

The writer is a professor at the Gokhale Institute of Politics and Economics, Pune, and a former central banker. Views expressed are personal. (Through The Billion Press)