THE GIST of Editorial for UPSC Exams : 28 August 2019 (Government should use RBI funds in a prudent manner (The Hindu))

Government should use RBI funds in a prudent manner (The Hindu)

Mains Paper 3: Economy
Prelims level: Bimal Jalan Committee
Mains level: Fund transfer to boosting economy

Context

• After a long tug of war, the government has eventually had its way with the Reserve Bank of India, managing to get it to part with a portion of its accumulated reserves.
• The RBI board has decided to transfer a massive ₹1,76,051 crore to the government, including a sum of ₹52,637 crore from its contingency reserve built over the last several years.

Consequences behind the surplus transfer

• The outflow from the RBI’s reserves was limited to this amount only because the Bimal Jalan Committee, appointed to recommend the economic capital framework for the RBI, decided to keep a major part of the reserves locked up and out of the reach of the government while opening up the remainder with strict stipulations.
• The Committee has recommended, and rightly so, that the Currency and Gold Revaluation Reserve Account (₹6.91 lakh crore as of June 30, 2018), at least half of which was eyed by the government, represents unrealised gains and hence is not distributable to the government.
• In the case of the Contingency Reserve (built out of retained earnings), which was ₹2.32 lakh crore as of the same date, the committee said that it should be maintained within a band of 6.5-5.5% of total assets.
• It left it to the RBI board to decide the precise percentage it was comfortable within this band and transfer the excess to the government.
• The board has decided to peg this ratio at 5.5% thus enabling it to transfer a sum of ₹52,637 crore to the government immediately.
• The committee should also be complimented for clearly specifying that the revaluation reserve cannot be used to bridge shortfalls in other reserves.
• In principle, it could be argued that the government as sovereign owns the RBI and hence there is nothing wrong if it decides to tap the central bank’s reserves.
• Yet, that it actually chose to do so is unfortunate because these reserves represent inter-generational equity built up over several years by the RBI by squirrelling away a part of its annual surplus.
• It is morally unacceptable that any one government can swallow even a part of such funds to help meet its expenditure in a particular year.

Way forward

• The reserves, as the Jalan Committee has pointed out, represent the country’s savings for a ‘rainy day’, which is a monetary or financial crisis.
• Interestingly, the net surplus of ₹1,23,414 crore posted by the RBI in 2018-19 is more than double that of the previous year and is considerably higher than the ₹65,876 crore that it netted in 2015-16.
• Only the release of the RBI’s Annual Report in the next few days will help in the understanding of the reasons behind the sharp jump in the surplus.
• The big transfer from the RBI will free up the hands of the government at a time when tax revenues are undershooting the target by a long chalk. The money, it is hoped, will be put to use in a prudent manner.

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Prelims Questions:

Q.1) Consider the following:
1. Photosynthesis
2. Respiration
3. Decay of organic matter
4, Volcanic action

Which of the above add carbon dioxide to the carbon cycle o Earth?
a) 1 and 4
b) 2 and 3
c) 2, 3 and 4
d) 1, 2, 3 and 4

Correct Answer: C
Mains Questions:
Q.1) What is the contingency reserve fund? What are the consequences behind this transfer?