Games People Play: The Many Uses of the RBI’s Dividend to the Government

On May 22, the Reserve Bank of India (RBI) declared a dividend payout to the Government of India (GOI) of Rs 99,122 crore (991.22 billion) for the 2020-21 accounting year (AY), a nine-month (July-March) period as different from the 12-month (July-June) format the RBI had been following till 2019-20. The switch-over was made to align the central bank’s AY with the GOI’s. In annualised terms, the dividend handed to the GOI this year works out to Rs 1,332.30 billion, which is nearly 2.4 times the dividend paid last year (which was Rs 571.28 billion).

A quite handsome payout by all accounts, more so when one considers that, in its annual budget 2021-22, the GOI had estimated the likely aggregate dividend receipt from the RBI plus all the public sector banks together at a modest Rs 535.10 billion. The RBI’s contribution alone has now turned out to be very nearly twice that sum. A quick look at the annual dividend the GOI received from the RBI in recent years will put things in perspective:

(*: The dip in 2017 was a direct consequence of the RBI’s depressed profits as demonetisation impacted its earnings in several different ways.)  (**: For a nine-month period.)

So, not only is this a very generous payout in itself, it remains the highest ever except for the year 2018-19 when the RBI transferred to the GOI a sum of Rs 1,761 billion. But 2018-19 was an outlier, because in that year, the RBI had chosen to give effect, at one go, to the recommendations of the Bimal Jalan Committee on the central bank’s Economic Capital Framework (ECF), opting not only to pay out its entire annual surplus of Rs 1,235 billion to the GOI, but to release an additional quantum of Rs 526 billion by marking down its accumulated capital reserves.

A lively debate had broken out then around that transfer, and many commentators and analysts saw it as indiscreet and avoidable – and as rather poor messaging on the part of a central bank that had, over the years, built up a formidable reputation for its professional independence. It was seen as being a case of the RBI doing the bidding of the ruling political establishment which was seriously hamstrung by a burgeoning budget deficit and falling tax revenues and didn’t mind twisting an arm to secure some extra funding.

As generous as the latest payout has proved to be – for it exceeded the recipient’s expectations by quite a bit – it yet seems that not everyone considers it generous enough. Well-known economists Ila Patnaik and Radhika Pandey are convinced that the RBI could have – indeed, should have – done more. The subtitle of their recent article itself makes this point quite unequivocally: “The RBI has held back Rs 20,000 crore (Rs 200 billion) as provisions. This could have helped the Modi government at a time of tremendous fiscal pressure”.

The article goes on to try and drive this point home again and again at different places. Here are a few examples:

“This year, in the midst of the worst epidemic seen in a century and one that is pushing India into a humanitarian and economic crisis, instead of paying an additional Rs 20,000 crore (Rs 200 billion) to the government, the RBI has decided to hold back the money.

The surplus transfer from the RBI will provide some cushion. But another Rs 20,000 crore (Rs 200 billion) should have been better used in buying vaccines or provisioning for indemnity such as being demanded by some vaccine companies.”

In their article, the RBI comes across as not only culpable of insensitivity to governmental or national priorities, it is also seen as being very nearly a freeloader not accountable to anybody.

Sample these unedifying comments strewn across the essay:

“Central bank profits …. belong to the government, and are normally transferred back to governments…. As a central bank does not have to pay the public any interest on cash, the entire interest paid by the government is part of the income of the central bank….. (It) pays no interest to banks for the large part of their funds that are held with it under the requirements of the cash reserve ratio… The RBI expenditure is not audited by the Comptroller and Auditor General, as are other institutions and regulators…. Any attempts by the government to make the RBI accountable and control its expenses have been met with a lot of hue and cry and shrill arguments about its independence…”

It is easy to lose sight of the fact that the article’s lead author is a former Principal Economic Adviser to the GOI, no less – and not a fire-eating anti-establishment warrior. But then, such comments reside in the realm of private opinion and need not necessarily offer themselves for a fact check. But can the same be said about the writers’ central thesis, namely that the RBI had no business withholding Rs 200 billion from the GOI? That this was verily a case of wilful disregard of what is right every which way? That the RBI did not need to appropriate anything – presumably not even one rupee – towards the reserves that sit on its balance sheet?

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Indeed, the authors well know why the RBI did what it did. And they mention the reason themselves when they reference the Bimal Jalan Committee which had recommended that, going forward, the central bank maintain a Contingency Risk Buffer (CRB) equivalent to between 6.5% and 5.5% of its total assets/liabilities. (To quickly recapitulate the context, the committee had been set up primarily to go into the question of what portion of its annual profits/surplus the RBI could transfer to the GOI every year and how much it needed to plough back into its own balance sheet. The ploughed-back profits are the bank’s ‘reserves’ which every healthy balance sheet builds up so as to take care of unexpected and unforeseen exigencies. The CRB band of 6.5 -5.5% is a function of those profit payout/retention recommendations.)

The RBI accepted those recommendations with alacrity, implemented them in full straightaway (though the committee had likely envisaged a phased implementation), and opted to peg the CRB at the lowest point (5.5%) of the suggested band. And this is what made it possible for the central bank to make a stunning gift of Rs 1,761 billion to the government for 2018-19 – for it scaled down its CRB from its previously-existing level of about 6.4% to 5.5%, thereby releasing a substantial Rs 526 billion from its past profits. To many observers, this bordered on profligacy, something not commonly associated with a mature central bank anywhere.

During the nine months ended with March, 2021, the RBI actually posted a gross surplus of Rs 1,198 billion. When it came to paying the dividend to the GOI, however, the central bank had first to retain a sum of Rs 207 billion (Rs 20,700 crore), and appropriate it towards augmenting CRB, precisely because it would have otherwise fallen short of the basic minimum CRB of 5.5% it has committed itself to maintaining at all times.(It is an altogether different matter that it is actually falling a little short even now, as it has ever since 2018-19.) Had the RBI not retained this amount and handed out the entire Rs 1,198 billion (rather than Rs 991 billion) to the government, its CRB would have lagged even the 2019-20 level of 5.38%, as a back-of-the-envelope calculation tells us. This is inevitable in any growing balance sheet in which the rising asset levels warrant a fresh allocation of funds towards maintaining committed ratio values. Between 2019-20 and 2020-21, the RBI asset book expanded to Rs 57,076 billion from Rs 53,347 billion, an increase of a little over Rs 3,700 billion. (And 5.5% of Rs 3,700 billion is more than Rs 200 billion.)

So, when Patnaik and Pandey have an issue with the ‘withholding’ of Rs 200 billion, they are really contesting both what the Bimal Jalan Committee had recommended (and the RBI agreed to follow) and what it had been mandated to consider, viz., the quantum of profit to be paid out. For Patnaik and Pandey aver that they believe that since “the central bank is fully backed by government”, it “does not need these various reserves” at all.

They conclude their article with an even stronger assertion: “The Jalan Committee recommendations, that the RBI should be allowed to hold back money by ‘provisions’ regardless of the circumstances in the country, need to be reviewed urgently.”

Now, that bit about ‘regardless of the circumstances in the country’ is an interpolation in its recommendations that the venerable Bimal Jalan Committee may not find quite to its liking. The parentheses marking the otherwise innocuous word ‘provisions’ also register a healthy scepticism of this hoary old element of accounting. But what is really important to note here is that Patnaik and Pandey are wholly dismissive of the very terms of reference of the Jalan Committee. One is aware that this is a position widely shared by members of the present government, too, and it is instructive to note this congruence of views. In effect, the underlying opinion here is that the RBI’s balance sheet need be no more than a pass-through for the government’s finances. In other words, an ‘independent’ central bank is neither here nor there.

Also read: Lack of Political Will, Not Grains, Is Why We Do Not Have Universal PDS

It is gratifying to recall that, in an article reviewing the RBI’s dividend payout to the GOI in 2019-20, we had anticipated the demands now being made by the advocates of a still more liberalised dividend policy for the RBI.

The article had argued thus:

“Since the RBI will likely be unable (in future)…… to match the bounty it handed out to the government in 2018-19, there may be a clamour for reviewing the ECF architecture once again. One of the demands could be to further scale back the RE (another name for CRB) threshold so that annual surpluses need not be committed to shoring up the RE ratios and can be released to the GOI in full.”

The article by Patnaik and Pandey is an advocacy of precisely this kind.

In conclusion, one comment about the political trajectory of the Patnaik-Pandey article will hopefully be in order. In a piece ostensibly dedicated to ideas of accounting propriety and the matrix of central bank-government relations, the authors curiously introduce an apparently unrelated subject: (COVID-19) vaccination.

They suggest that, had the RBI not chosen to hold back – quite unjustifiably, as they argue – from the GOI the sum of Rs 200 billion, that amount could have been profitably used in ‘buying vaccines and provisioning for indemnities such as being demanded by some vaccine companies’. This observation is made in a matter-of-fact tone but its essence is anything but. Vaccines are a vexed issue in India now, and the GOI’s reluctance to foot the vaccination bill – despite having made all the appropriate noises last year about inoculating the whole citizenry against the virus – is a cause for serious discontent across the country. The government had even made an allocation of Rs 350 billion in the current year’s budget towards COVID-19 vaccination.

Now of course it desperately wants us to forget all about that budget allocation. It seems extraordinary that now Patnaik and Pandey are suggesting that it is only the absent transfer of Rs 200 billion from the RBI’s books that could have helped Indians with getting the vaccines in their arms. Are they telling us that minus that amount, poor GOI can do precious little to help its hapless citizens? But they need really not worry: for we all know that even though the government should, and can, fully support universal COVID-19 vaccination, it does not want to. The fig leaf of a ‘should-have-been-received’ dividend is no more than a fig leaf.

Anjan Basu can be reached at basuanjan52@gmail.com.