Dividend Dilemma: RBI's 2.11 Lakh Crore Transfer To Government Opens Up An Old Debate

In a recent development, the Reserve Bank of India announced a lump-sum dividend of Rs 2.1 lakh crore to the Government of India. This, according to reports, has exceeded market expectations of over Rs 80,000 crore.

The Bumper Surplus

According to reports, compared to the previous fiscal, when the dividend transfer by the RBI to the Centre was Rs 87,416 crore, this time around, the dividend is about 141 per cent higher than what was earmarked for the government.

Previously, in 2019, the RBI surplus made major headlines when the central bank transferred Rs 1.76 lakh crore to the government. This was the highest dividend given to the government, before, during the tenure of the current RBI governor, Shaktikanta Das, who assumed office in 2018.

Raghuram Rajan and Urjit Patel's Reservation

This has been a rather controversial topic in the past, as it has entered the political discourse. In fact, it was also often sighted as a reason behind the contentious resignation of former RBI governor Urjit Patel. Patel reportedly did not favour the RBI transferring such a gargantuan amount to the government. Another former RBI governor, Raghuram Rajan, was also not entirely in favour of the move.

A reflection of their thought of the RBI giving dividends to its only shareholder, was observed during their tenure, as in 2013-14, the RBI transferred Rs 52,679 crore, then Rs 65,896 crore in 2014-15. When Patel took charge, the central bank gave out Rs 65876 crore in 2015-16 and a low of Rs 30,659 crore in 2016-17.

Compare this to Shaktikanta Das's first tenure at the Central Bank, when Rs 50,000 crore was transferred to the government in 2017-18. During Das's tenure, the surplus given to the government has only surged.

How Does The RBI Generate Revenue?

The central bank makes money and, by extension, adds to its surplus by giving deposits to banks. While the bank buys assets from the markets, its does not pay interest on its liabilities. In addition, financial assets in the form of domestic and foreign government bonds held by the government pay interest, leading to a surplus.

The Dividend Predicament

Both the former RBI governors looked for greater independence of the central bank for better mobility of polices and the economy at large. Previously speaking on the matter of dividends, Raghuram Rajan had said to the Indian Express, “Every year, we have in mind a growth rate of permanent reserves consistent with the economy’s cash needs and our inflation goals,”

Rajan further added, “Given that budgeted growth rate, to accommodate the special dividend, we will have to withdraw an equivalent amount of money from the public by selling government bonds in our portfolio, or alternatively, doing fewer open market purchases than we budgeted.”

It is to be noted that this is common practice around the globe, even in the US, which does not have a plethora of PSUs like India to many other European nations, The Federal Reserve earmarks all its net earnings to the US Treasury Department. In the UK, the Bank of England, during the pandemic, decided to finance the UK government directly.

'Will Limit RBI's Capabilities'

When it comes to the current development, no comments have been obtained from either of the former RBI governors yet. Nevertheless, the decision has engendered mixed reaction from economists. Suman Mukerjhee, a noted economist, said, according to various reports, he said, that this would limit the RBI's capacity to aid banks that will run into fiscal trouble with the liquidity.

Another economist, Abhirup Sarkar, according to the Economic Times, raised questions over the government's motive and said, "The payment might not be from its income and the central bank could have used its reserves to pay the hefty dividend."