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[op-ed snap] Govt. needs to be prudent in using RBI’s transfer


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : RBI transferring surplus to govenrment


The debate on the sharing of reserves between the RBI and the government has settled with the Bimal Jalan committee’s report. It clarified the volume of reserves required for risk provisioning to counter a financial stability crisis if it were to arise. RBI Board accepted these recommendations and decided to transfer ₹1,76,051 crore to the government. 

RBI – government relationship

Though RBI belongs entirely to the government, the integrity of its balance sheet is important to ensure financial stability and to combat market risks.

What the committee says 

  1. It concluded that provisioning has to be more stringent than in developed countries to ensure the perception of safety as India has low sovereign rating and the Indian rupee does not have reserve currency status.
  2. It suggested a revised economic capital framework that distinguishes the economic capital of RBI between ‘revaluation reserves’ and ‘realised equity’. 
  3. Revaluation reserves are a risk buffer against market risks and not available for transfer. 
  4. It used the Expected Shortfall (ES) method to measure the market risk and adopted a stringent confidence level of 99.5% against the practice of 99% by other central banks.
  5. As per the revised framework, economic capital can be in the range of 24.5% to 20% of the balance sheet. The committee recommended the range for equity to be between 6.5 to 5.5% of the balance sheet.

RBI capital transfer – benefits government

  1. RBI decided to transfer the entire surplus of ₹1,23,414 crore earned during 2018-19. It had already transferred ₹28,000 crore as interim dividend in February 2019, the remaining amount will be transferred in the current fiscal. 
  2. The additional fund transfer from RBI provides relief to the government. 
  3. Analysis of the budget shows that the tax revenue projections are too optimistic. The actual net tax revenue collection of the centre in 2018-2019 was ₹15.9 lakh crore and to achieve the budgeted target of ₹19.78 lakh crore in 2019-2020, the net tax revenue will have to increase by almost 25%. 
  4. The expected shortfall in tax revenue for the Central government is likely to be about ₹70,000 crore.
  5. With the economy slowing down and GST not yet buoyant, the shortfall may even be higher. 
  6. The infusion of additional funds will help the government to overcome this shortfall and achieve the fiscal deficit target without affecting allocations to social sector and poverty alleviation.

Challenge to states

  1. States will have to suffer the consequence of lower-than-budgeted revenue realisations. 
  2. They presented their budgets taking into account the tax devolution based on the Central budget forecast and the shortfall in collections that will adversely impact their expenditure allocations to various sectors.

Way ahead

  1. If the tax revenue growth picks up, then the government can use the additional money to clear the dues of the Food Corporation of India and fertiliser companies.
  2. The additional funds can also be used to spend on capital expenditure.


The decision of the RBI Board must be welcomed and should help the government in combating the economic slowdown and to conform to the fiscal targets. Government should be prudent in using these funds.

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