In 2013, the year before Prime Minister Modi assumed power, Morgan Stanley designated India as one of five weak emerging-market economies known as the “Fragile Five” due to its reliance on foreign capital to fuel its economies and, in many cases, significant current account deficits.
How did the RBI policy evolve to provide surplus money to the government during various government periods?
In 1997, there was a need to look into the RBI’s Capital Framework to determine how much reserve the RBI should retain as a percentage of its assets, and a committee led by V Subrahmanyam was formed. The committee presented a report proposing 12% of its assets. The RBI did not accept the findings.
In 2004, another group led by Usha Thorat met to review the RBI’s capital framework. The group recommended about 18 percent, which the RBI did not accept. In 2013, the Y. H. Malegam committee recommended that excess reserves be given to the government.
The typical norm worldwide, including the United States and the United Kingdom, is 8% of total assets. In 2008, the US Fed allocated an adequate quantity of reserves to help American banks throughout the financial crisis. So there is nothing new that the Indian government wants its central bank to accomplish, and we are all aware of how our banking sector, particularly PSUs, has performed over the last decade.
When revenue collection is poor due to large-scale tax evasion and there is a need to invest in massive infrastructure projects to build facilities through job creation and general expansion (goal of $5 trillion GDP), the government requires funding.After all, RBI money is also people’s money.Then why can’t the government use it? Many years ago, the government required that all banks meet lending targets in agriculture, and that any shortfalls be paid to NABARD for investment in rural infrastructure development in the states through the state government. This direction benefitted many villages. That being said, the transfer of a share of reserve money by the RBI to the central government for nation building is justifiable, according to the prominent economist and former RBI governor Bimal Jalan’s committee report.
Functions of the RBI and how their performance improved in all functions over the decade
- Regulating the financial system
- Issuing and managing currency
- Implementing monetary policy
- Managing foreign exchange
- Managing government debt
RBI Dividend to Central government :
The Reserve Bank of India (RBI) granted the Central Government a dividend of Rs 2.11 lakh crore for fiscal year 2023-24. This is more than double the amount from a year ago. The Reserve Bank of India (RBI) transfers the surplus, or the excess of income over expenditure, to the government in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934. According to Section 47 of the Act, the Central Government will get the remaining earnings after deducting bad debts, depreciation, and other expenses. This is the situation in the vast majority of countries; the laws of the US Federal Reserve, Bank of Japan, Bank of England, and German Bundesbank clearly state that earnings must be paid to the government or treasury. The surplus and dividend computations were based on the Economic Capital Framework (ECF) recommended by the Bimal Jalan Committee. The committee recommended that the RBI maintain a contingent risk buffer (CRB) of 5.5 to 6.5 percent of its balance sheet.
Banks’ gross NPAs fell from 11.25 percent in 2018 to 3 per cent in September 2023, with loan growth of roughly 15 per cent. In FY24, banking sector profits climbed by 39 per cent to Rs 3.1 lakh crore. Net profit for listed public and private sector banks increased 39 per cent to Rs 3.1 lakh crore in FY23 from Rs 2.2 lakh crore in FY20. While public sector banks recorded a record net profit of Rs 1.4 lakh crore this year, a 34 per cent increase over the previous year, private sector banks’ net profit was Rs 1.7 lakh, up 42 per cent from Rs 1.2 lakh crore last year.
A decade ago, the Indian rupee was among Asia’s most volatile currencies. However, it has since become one of the most reliable. This transition demonstrates India’s growing economic strength and successful supervision by the Reserve Bank of India (RBI). India is working to promote the international use of its currency, particularly in trade. Enhancing the rupee’s global footprint can help to stabilize its value. In addition, the RBI is improving its capabilities for intervening in the foreign exchange market to better handle future inflows.
In 2014, the economy was plagued by significant fiscal and current account deficits and double-digit inflation. Now, inflation is under control, the fiscal deficit is heading downward, and the current account deficit is barely over 1 per cent of GDP, and foreign exchange reserves cover about eleven months of imports. It’s been a journey from vulnerability to stability and strength. Two points must be highlighted here. The government’s COVID management and the The immunization record has contributed significantly to the economy’s rapid rebound. Similarly, the effective management of crude oil supplies at appropriate prices in the last two years This is noteworthy.
Humans are incapable of appreciating the unseen—the mistakes not made and The risks were avoided, yet counterfactuals are all around us. As the government addresses long-standing issues such as inadequate infrastructure and Financial exclusion causes aspirations to grow and expectations to shift upward. This is actually a tribute to the policy and performance of the government. A significant expansion of the The government’s capex spending over the last 10 years has largely driven high growth rates. The government and RBI’s proactive inflation management substantially mitigated the spiral in The second global shock, the situation in Ukraine, has caused commodity prices to rise.
It is important to note that, at the time, When Prime Minister Narendra Modi took office for the first time in 2014, the Indian economy was not particularly encouraging. The Indian economy was experiencing hard times. That resulted in less than 5% growth of GDP at factor cost at constant prices for two successive years, namely 2012-13 and 2013-14. WPI inflation in food products, which averaged 12.2 per cent yearly in the five years ending 2013-14, was notably higher than non-food inflation. One of the elements influencing sub- Five percent growth. There is more than enough anecdotal evidence to suggest that the quality of bank lending deteriorated during the UPA period, with large loans made to government-friendly corporates without appropriate due diligence on the necessity of such loans or the borrowers’ ability to repay them.
In summary, India’s ‘Mission Mode’ strategy to overcoming festering difficulties positions the country in good stead for handling current and upcoming problems. The increasing legitimacy of the RBI Reducing inflation will anchor inflationary expectations, resulting in a steady interest rate. environment for enterprises and the public to make long-term investment and expenditure Decisions, respectively.
