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
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
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.