[Editorial Analysis] Timely windfall

Mains Paper 3: Economy
Prelims level: Bimal Jalan committee
Mains level: Indian economy growth and development

Context:

• The Reserve Bank of India’s has decided to transfer Rs.99,122 crore of surplus to the Centre comes as a windfall to the government.

What is the issue?

• The RBI’s transfer is a much-needed buffer, but there are risks in banking on these surpluses.

• The payout is almost double the Rs. 53,511 crore that the Finance Minister had budgeted for by way of dividend receipts, including from nationalised banks and financial institutions.

• RBI has generated a surplus that is over 73% higher than what it posted for the previous 12-month period ended June 2020, is also noteworthy when one considers that the bank just changed its accounting calendar from July-June to an April-March.

• RBI’s annual report, shows that a sharp 63% contraction in expenditure was a major factor in boosting the surplus, especially as income fell by 11%.

• The central bank, by intervening in the foreign exchange market to smoothe volatility and also recieved the record foreign direct investment inflows that exceeded $81 billion in the last financial year, as well as the sizeable portfolio investments from overseas.

• There is a 69% increase in exchange gain.

Way ahead:

• The economic disruption caused by pandemic and the lack of visibility on the costs that the economy is going to have to bear in the coming months, the RBI’s transfer surely provides a much-needed buffer to the government’s finances.

• Both the Centre and the central bank need to be cognisant of the risks in making a habit of banking on these surpluses to help central govt.

• Reserve Bank has ensured that it maintains contingency reserves at exactly 5.5% of the overall size of its balance sheet, the level of its reserves provides little wiggle room to safeguard against a sudden, unexpected financial crisis and is at the lower end of the 5.5%-6.5% band recommended by the Bimal Jalan committee.

• Given the higher spending needed to bolster vaccinations, health care and direct fiscal support, the RBI’s balance sheet could swell in size this year too.

Conclusion:

• It should be kept in mind that central bank is ultimately the lender of last resort to the nation as a whole and can ill-afford to be less than adequately funded to meet every conceivable contingency.

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Prelims Questions:

Q.1) With reference to the Production Linked Incentive (PLI) Scheme for Promotion of Domestic Manufacturing of critical Key Starting Materials (KSMs)/ Drug Intermediates and Active Pharmaceutical Ingredients (APIs), consider the following statements:

1. It is an initiative of Union Ministry of Finance.

2. It aims to set up greenfield plants with minimum domestic value addition in four different Target Segments with a total outlay of Rs.6,940 cr. for the period 2020-21 to 2029-30.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: B

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