‘Government won’t get room to spend more’

MUMBAI: Facing a revenue shortfall and uncertainty over a planned sovereign bond issue, the government is set to receive a Rs 1.76 lakh crore bonanza from the Reserve Bank of India.The RBI board, headed by governor Shaktikanta Das, which met in Mumbai on Monday, approved a transfer of Rs 1,76,051 crore to the government. This includes Rs 1,23,414 crore of surplus or dividend for the year 2018-19 and Rs 52,637 crore of excess provisions — a one-time transfer which is also a first for the central bank.The transfer of the excess provision has been a bone of contention between RBI and the government since the time Raghuram Rajan was the governor. Differences had come to a head during former governor Urjit Patel's tenure, with external board members and the former economic affairs secretary pushing for a transfer, which led to Patel's resignation last December. It was after Das took over in December 2018 that the Jalan panel was constituted.The transfer is based on a formula recommended by the Bimal Jalan committee’s revised Economic Capital Framework (ECF) that was adopted by the board on Monday. The ECF prescribes the minimum amount of reserves RBI must hold to maintain financial stability in the forex and money markets in a worst-case scenario. Amid the battle for funds, the panel had been set up to work out the optimum capital level with RBI.The surplus of Rs 1.23 lakh crore is the largest ever for the RBI. The highest that RBI has transferred so far was Rs 65,896 crore in 2014-15. The RBI has stopped ploughing back surplus into reserves and has been remitting 99% of its gains to the government since 2013-14.The record earning of Rs 1.23 lakh crore in 2018-19 followed huge dollar intervention by RBI in the first half of 2018-19. RBI also made money by lending money to banks and buying back interest-bearing bonds through open market operations. These operations, done to stabilise financial markets, ended up lining RBI’s coffers.While the transfer is at the higher end of the spectrum based on Jalan's recommendation, it is way below the Rs 3 lakh crore expected by some in the government. Bank of America Merrill Lynch in an earlier report had pegged RBI’s surplus reserves at $43 billion or Rs 3 lakh crore.The government is, however, seeing it as a victory of sorts as it has managed to extract surplus funds that were lying idle with RBI.The Jalan panel identified RBI’s capital in two parts -- realised equity (actual profits) and revaluation balances (where the value of reserves had gone up). The panel had recommended that RBI retain realised equity at between 5.5% and 6.5% of total assets, as against 6.8% at present. The board, however, chose to retain equity at a lower level of 5.5% and transferred Rs 52,637 crore of surplus.According to Ashish Vaidya, DBS Bank's executive director and head of trading and asset-liability management, the transfer will provide a cushion for the government in making up for revenue shortfall through tax collections. “Bond yields will soften as the government will not need to borrow more to meet its requirements,” said Vaidya. Lower bond yields result in lower interest rates in the system which benefit corporates and therefore improve stockmarket sentiment as well.“It will provide a cushion for budget numbers, but it will not give the government room to spend more,” said Madan Sabnavis, chief economist, Care. He added that this would not be inflationary. “We are in depressed times and there is likely to be a revenue shortfall. It (the transfer) is going to finance what is already there in the budget. Even if it is additional, it is going to be in the margins,” he added.The 578th meeting of the central board was attended by RBI deputy governors N S Vishwanathan and MK Jain. Other members included PK Mohanty, Dilip Shanghvi, N Chandrasekaran, Bharat Doshi, Sudhir Mankad, Manish Sabharwal, S Gurumurthy, Revathy Iyer and Sachin Chaturvedi. The government directors Rajiv Kumar, finance secretary and secretary, department of financial services and Atanu Chakraborty, economic affairs secretary, were also present.