Arun Jaitley_Shaktikanta Das
Since the appointment of Shaktikanta Das as the Governor of the Reserve Bank of India (RBI), speculation has been rife over the issue of interim dividend and transfer of reserves to the government. The first part is clear now. In its highly anticipated board meeting held on February 19, RBI decided to transfer Rs 28,000 crore as interim dividend to the government.
Now interim dividends are not as contentious an issue as raiding the central bank’s reserves. But three points are worth noting.
First, this is the second successive year when the RBI has given an interim dividend. Section 47 of the RBI Act 1934 says that the surplus profit should be transferred to the government “only after making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds (and for all other matters)”. The Act is silent on when the payment should be made.
Second, the practice so far has been to transfer profits after the end of RBI’s financial year (July-June). These profits are usually transferred after the August board meeting when the central bank presents its statutory annual report to the government.
The dividend is accounted as non-revenue receipts of the government for that financial year. For instance, in the financial year 2016-17, the government received a dividend of Rs 65,876 crore from RBI on August 11, 2016. This was RBI’s surplus for its own financial year that ended in July 2016.
With two successive years of interim dividends, this practice has become unsettled. In 2017-18, the government first received final dividend worth Rs 30659 crore, along with an interim dividend of Rs 10,000 crore.
Likewise, in the current year, it first received Rs 40,000 crore in August 2018 plus Rs 28,000 crore now as interim dividend. Thus, in both the years, RBI’s interim dividend helped the government manage its fiscal position.
Third, there is the issue of classifying this interim dividend in RBI's balance sheet. Just like any dividend, the interim one is also estimated by subtracting expenditure from income. The press release after the Board meeting said: “Based on a limited audit review and after applying the extant economic capital framework the Board decided to transfer an interim surplus of ₹ 280 billion to the central government for the half-year ended December 31, 2018”. This implies RBI prepared its income and expenditure statement for the half-year period resulting in a transferable surplus figure of Rs. 28,000 crore.
After the income and expenditure estimations, the final dividend is shown as part of ‘Other liabilities’ in the balance sheet as an adjusting amount. However, in the case of an interim dividend, the dividend has already been paid. Thus, RBI includes interim dividend as “Other Assets” in its balance sheet. In its Annual Report (2018-19), when the interim dividend of Rs 10,000 crore was paid in March-2018, RBI explained: “Other Assets’ comprise fixed assets…and miscellaneous assets. Miscellaneous assets comprise mainly loans and advances to staff, amount spent on projects pending completion, security deposit paid, interim amount transferred to central government, etc.”
Principally, like all owners, the government can ask for an interim dividend to smoothen its financial position. However, governments are advised against such practices, especially in an election year. Sudden transfers not just surprises different stakeholders, but can also raise doubts over the fiscal position of the government.
The government would do well to clearly define the timing and nature of these transfers from the central bank and make it rule-based. In an earlier column, this writer showed how different countries have instituted rules for such these transfers.
The timing is extremely important, as it was the issue of interim dividend in Turkey, which spooked the markets. The decision did not surprise the market in India, as it was widely expected.
It is likely that the Bimal Jalan committee will take note of these developments while making recommendations.(The author teaches economics at Ahmedabad University. Views are personal)