Answer Writing Practice for UPSC IAS & UPPSC Mains Exam: Paper - IV (General Studies – III) - 18 September 2019

Answer Writing Practice for UPSC IAS Mains Exam


Answer Writing Practice for UPSC IAS & UPPSC Mains Exam


UPSC Syllabus:

  • Paper-IV: General Studies -III (Technology, Economic Development, Bio-diversity, Environment, Security and Disaster Management)

Q. Critically analyze the recent decision of RBI to transfer surplus funds to the Government. (250 words)

Model Answer:

  • Why in News?
  • Introduction
  • Positives of fund transfer to the Government
  • Negative consequences of the decision
  • Conclusion

Why in News?

RBI is to transfer Rs. 1.76 trillion to the government this fiscal. The transfer includes surplus of Rs. 1.23 trillion and Rs. 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF).

Introduction:

The transfer of surplus funds from RBI is in line with the recommendations made by the Bimal Jalan Committee. It is expected that the transfer would boost the overall revenue for the government and meet its fiscal deficit target.

Positives of fund transfer to the Government:

  • The NITI Aayog Vice Chairman emphasized that transferring reserves would not endanger RBI's balance sheet.
  • Former Chief Economic Advisor Arvind Subramanian had estimated RBI could give Rs 4 lakh crore, but out of that they are only giving Rs 58,000 crore (the surplus component).
  • The transfer of funds is expected to help the government at a time when India is going through a period of economic slowdown, triggered by slower consumption demand and weaker investment.
  • It would also help the government to counter the shortfall in revenue and tax collection.
  • Due to low inflationary pressure, economists believe that the move will not have a negative impact in the long run.

Negative consequences of the decision:

While the fund transfer does not immediately do RBI any harm, however, the central bank now has far less room to face a financial catastrophe, since its reserves have been emptied to their minimum levels or thereabouts. There are other important issues related to this move of RBI as well. They are:

  • RBI’s board accepted the committee’s recommendations and readily acted upon it. This sets the precedent for future transfers and risks becoming the accepted template.
  • The government cannot rely on this source of funding in the near future.
  • The RBI’s balance sheet should be strong enough to support banks if there is a need to recapitalize them during a financial crisis.
  • The RBI needs adequate capital reserves for monetary policy operations, currency fluctuations, possible fall in value of bonds, sterilization costs related to open-market operations, credit risks arising from the lender of last resort function and other risks from unexpected increase in its expenditure.
  • The RBI has maintained the view that it needs to have a stronger balance sheet to deal with a possible crisis and external shocks.

The RBI needs to maintain a large surplus so as to look after the overall economic and banking system well. Such transfer of funds to the Government diminishes the coffers of the RBI and puts the RBI in a vulnerable position apart from diminishing its autonomy, as pointed out by Raghuram Rajan and Urjit Patel.

Conclusion:

It is expected that the fund transfer would not only help in achieving 3% fiscal deficit target of this year but will also help the government to spend more on any fiscal stimulus plan to tackle the slowdown in the economy. The RBI’s transfer of surplus funds to the government could thus effectively turn into a monetary stimulus for the economy which has been slowing down for several consecutive quarters now.

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