RBI To The Rescue of Modi Government – It’s Election Time!

On February 18, the Reserve Bank of India (RBI) decided to transfer Rs.28,000 crore as “interim dividend” to the Central government, bringing its total transfer for 2018-19 to a record Rs.68,000 crore. RBI has already transferred Rs.40,000 crore as dividend for 2017-18 in August 2018. This exceeds the previous record, also under the present government, of Rs.65,896 crore done in 2015-16. The interim dividend is a kind of advance transfer of surplus – it will be booked in the next financial year’s accounts of RBI. The RBI’s financial year is July to June while the government’s financial year runs from April to March.

With this, the Narendra Modi government has also set a record of sorts in getting funds from RBI. In its near five years of rule, it has received a bounty of Rs.2.93 lakh crore from RBI. The previous five years (under United Progressive Alliance-II) had seen the transfer of just Rs.1.08 lakh crore. (See chart below, based on RBI Annual Reports and RBI Board announcement on February 18)

RBI is bound by law to transfer its profits to the Central Government, according to Section 47 of the Reserve Bank of India Act, 1934, which says: “After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and for all matters for which provision is to be made by or under this Act or which are usually provided for by bankers, the balance of the profits shall be paid to the Central Government.”

The Central bank’s main income comes from interest earned from government securities and bonds. As spelt out in Section 47, it transfers the amount needed for various provisions from its net income leaving behind a surplus.

Earlier governments were not too keen on enforcing this stipulation. The Annual Reports of the RBI for previous years show that the amounts transferred were about half of the profit in those years. But the Modi government has been insisting that almost the whole amount that is surplus with the RBI be transferred to it. Legally, it is within its right to do so. But there is a back story.

Take the case of the current financial year which ends in March 2019. The interim Budget for 2019-20, presented earlier this month, had predicted that there will be a shortfall of Rs. 1 lakh crore in the revenue from the Goods and Services Tax (GST). Another hole will be blown in the tax kitty because of concessions in corporate tax amounting to Rs.50,000 crore. On the other side, the government has already included Rs.20,000 crore additional expenditure in the Revised Estimates for 2018-19 on account of the programme to give income support to farmers. This amount was not budgeted for, and in a bizarre perversion of norms, the government had smuggled it into the budget with just two months of the fiscal year left.

As a result of these, and such other, opportunist policies – or downright disastrous ones – the government was left with a large revenue deficit, that is, its spending was turning out to be much higher than its income. In itself, there is nothing wrong with this as long as the spending is for the benefit of the people. But in the Modi government’s case, the shortfall in revenue is because it is giving concessions to corporates and the rise in expenditure is because of hare-brained schemes being brought in a few months before what promises to be a tough general election.

That is why the RBI is being squeezed dry. In fact, a close look at the interim Budget presented on February 1 reveals that the Government had already factored in the increased dividend from RBI because in the revised estimate for 2018-19, it had budgeted Rs 74,140 crore from dividends and surpluses of RBI, nationalised banks and financial institutions although the original budget estimate was Rs 54,817 crore.

It appears that the Modi government’s profligacy is being subsidised, at least partly, by RBI. Unfortunately, this profligacy is not helping the people of the country. Rather it is helping the corporate world, with some dole-outs to people before the elections.