Don’t bank on RBI surplus year after year

The Reserve Bank of India’s annual report, released last week, had a special significance because it was the first report after the central bank moved its accounting year to April-March. Now the accounting year of the bank, the government and most other entities are aligned, and this helps in many ways.

The shift meant that the annual report covered only nine months up to March 2021. The report was also important because the RBI decided to make a big transfer of Rs 99,122 crore to the government for a period of nine months, compared to Rs 57,127.53 crore for the whole of last year. It is much more than the Rs 53,511 crore budgeted by the government for the year.

The unexpected extra income will help the government, which is hard-pressed for finances because both tax and non-tax revenues have sharply declined during the pandemic situation.

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The RBI was able to make the payment because it generated a larger surplus in the shortened year. Its expenditure went down by as much as 63% while the income shrank only 11%. This resulted in a much larger surplus than it had last year. It made a record gain of Rs 50,629 crore by way of income from foreign exchange transactions. The high level of foreign direct investments and portfolio investments facilitated this.

This is significant because the high inflows happened when the economy was diminishing under the impact of lockdowns and other difficulties caused by the pandemic. An all-time high foreign exchange reserve of $590.3 billion was reached in January this year. A change in accounting system helped the RBI to book gains.

All these may be one-time factors. It is debatable whether RBI should actively deploy its forex holdings or other reserves to generate a surplus and help the government with it year after year. The RBI has done much to support the economy in the past one year. It is time for the central government to do some heavy lifting in policy and fiscal terms.

These considerations are important because the RBI report itself raises concerns over economic recovery and notes that “compared to financial crises, a health crisis can be more pervasive, persistent and debilitating in its impact on the real economy” and “letting down the guard is perilous’’.

It has cautioned that the flattening of the infection curve will not lead to restoration of growth and pointed out that the persistence of weak demand and missing private investment in the economy are not good signals. There is greater need now to push public investment, and only the Centre will be able to do that.