How RBI Generated a ₹ 99,122 Crore Surplus for the Government

On May 21, the central board of directors of the Reserve Bank of India (RBI) approved the transfer of Rs 99,122 crore as surplus to the central government for the accounting period of nine months ending March 31, 2021 (July 2020-March 2021). 

This transfer to the government has raised a few issues. Let’s look at them point wise. But before we do that, I want to make a disclaimer here. This is a complicated topic and to make sure that I am able to explain it in simple English, I have left out a few details. At the cost of repetition, the idea is to explain the issues at hand, than get all the details right. So, to everyone who understands this inside out, apologies in advance.

Here we go. 

1) The RBI’s accounting year was from July to June, different from the April to March period that the central government follows. From 2021-22 onwards, the accounting year of the RBI will be the same as that of the government. Given this, the last accounting year of the RBI was for the period of nine months from July 2020 to March 2021, as it moved to the government’s accounting year.

Despite this shortening in the accounting year, the RBI surplus to the government has jumped big time. The surplus transferred to the government from July 2019 to June 2020, had stood at Rs 57,128 crore, for a period of full 12 months. Clearly, there has been a huge jump in the surplus transferred to the government, once we consider the fact that the last accounting year of the RBI was just nine months long.

2) The annual budget of the central government presented by the finance minister Nirmala Sitharaman on February 1, had assumed that the central government would earn Rs 53,511 crore as way of dividend/surplus from the RBI, the nationalised banks and the financial institutions (read the Life Insurance Corporation of India). A few months later, the surplus transferred just by RBI is much more than Rs 53,511 crore. So what gives?

3) Let’s first try and understand how the RBI managed to generate such a huge surplus, which was unexpected (or at least not made public) up until the budget was presented earlier this year. From July 2020 to March 2021, the RBI gross sold a total of $85.2 billion of its foreign exchange.

An accounting change made in 2019, thanks to the Bimal Jalan Committee report, now allows the RBI to pass a part of the profit made from selling foreign exchange, to the government as a surplus. The earlier system was different (for the sake of simplicity we won’t go there).

There is a certain weighted average price at which RBI has bought these dollars over the years. The RBI doesn’t reveal this detail. As per Ananth Narayan, Senior India Analyst at the Observatory Group, this weighted average stood at Rs 55.70, from July 2019 to June 2020.

It would be fair to say the weighted average would be a little higher in the last accounting year, more towards Rs 58-60 to a dollar. The RBI would have sold these dollars, from July 2020 to March 2021, at Rs 72-75 to a dollar, and thus made a profit of around Rs 15 for every dollar sold.

A part of this profit has been passed on to the central government as a surplus. So far so good.

4) While at the aggregate level, everything looks fine, if we start to look at the detailed data, this doesn’t pass the basic smell test. Take a look at the following graph, which basically plots the total gross dollars sold by the RBI every month from July 2020 to March 2021.

Source: Centre for Monitoring Indian Economy. 

The above chart makes for a very interesting reading. Close to 60% of the dollars sold during  the accounting year were sold in the last two months ($50.5 billion of the total $85.2 billion). More than 77% of the dollars sold during the year were sold in the last three months ($65.9 billion of the total $85.2 billion). 

What does this tell us? It tells us that the RBI sold a lot of dollars after the finance minister had presented the budget. And a good chunk of the surplus given to the government was probably thus generated. If I was a gossip columnist, I would have definitely speculated, whether one of the secretaries in the FinMin dialled RBI for more money, around the time the budget was presented.

5) As mentioned earlier, the facts stated above don’t pass the basic smell test. The RBI at various points of time needs to sell dollars in order to manage the dollar rupee exchange rate. While the RBI sold $65.9 billion from January to March, it also bought $61.8 billion during the same period. On the whole, this wouldn’t have made much of a difference in moving the foreign exchange market in a particular direction, when it comes to dollar rupee exchange rate.

Take a look at the following chart, which plots the dollar rupee exchange rate from January 2021 to March 2021.

Source: Yahoo Finance.

As can be seen from the above chart, the dollar rupee exchange rate moved within a narrow  range of Rs 72.4-73.6, for the first three months of 2021.

So what does this really mean? The RBI sold lots of dollars after the finance minister’s budget speech, not because that was what was required in the foreign exchange market, but in order to generate an accounting surplus for a cash-starved government. If I were to put it in very simple terms, the RBI led by Shaktikanta Das, resorted to jugaad.

6) The way things stand the RBI is not allowed to directly finance the expenditure by printing money and handing it over to the government to spend. Hence, over the last couple of years, it has been resorting to different ways to do so. Selling and buying dollars in order to generate an accounting profit is one such way. 

If I were to be slightly flippant here I would ask a rhetorical question – Is RBI a central bank or is it a government sponsored hedge fund?

Another way of financing the government has been printing money and buying existing government bonds from banks and other financial institutions.

While this move does not hand over money to the government directly, it does ensure that the supply of money in the financial system goes up, and the newly created money can be used by banks and financial institutions to buy fresh government bonds. Hence, this is indirect monetisaton of the government’s fiscal deficit or the difference between what it earns and what it spends.

To conclude, while nothing can stop a central bank from printing money, the tactic of selling dollars in order to generate a profit depends on how much the rupee depreciates against the dollar. While the weighted average cost of the dollars that the RBI currently has, is less than Rs 60 to a dollar, it will only rise in the years to come.

Hence, for enough profit to be generated through this route, the rupee needs to depreciate against the dollar. But that’s where atma nirbharta will come in and limit the RBI’s hand. Strong nations have strong currencies, at least that’s the idea in the heads of the politicians who run the current government.

Modi’s Rs 2.5 lakh cr Asset Sale Plan Needs a Transparent Approach

The Prime Minister Narendra Modi has set a target of monetising 100 government-owned assets across sectors. As he said: “We have a target of 100 assets from oil, gas, airport, power, which we plan to monetise. This has the potential for investment opportunities of Rs 2.5 lakh crore.”

This is in continuation of the idea that the finance minister Nirmala Sitharaman had presented in her budget speech on February 1, 2021. As she had said:

“Idle assets will not contribute to Atmanirbhar Bharat. The non-core assets largely consist of surplus land with government Ministries/Departments and Public Sector Enterprises. Monetising of land can either be by way of direct sale or concession or by similar means.”

Hence, a lot of this idle assets are government owned land or will involve land in some form or other. This is a good and an innovative idea which some of the previous budgets lacked.

Many large Indian cities have a lot of government land lying idle while the cities on the whole are stretched for land. Hence, freeing up some of this land and earning some money in the process is a good idea.

Let’s look at this greater detail pointwise.

1) If you are the kind who likes walking around India’s big cities, you would definitely see a lot of government land lying unused bang in the middle of cities. Close to where I live in central Mumbai is the Bicycle Corporation of India, in one of the by lanes of Worli. In the one and half decades I have walked past the company, I haven’t seen any economic activity happening. Peepul trees now grow from the walls.

This is land bang in the middle of Mumbai, some of the most expensive real estate in the world, lying unused. This is criminal to say the least. Another great example of unused real estate are all the MTNL offices, all across Mumbai and Delhi.

The Heavy Engineering Corporation (HEC) in the city of Ranchi where I was born and raised, has acres and acres of land lying unused, while the city itself hardly has any land going around. This is land that has been lying unused for decades and needs to be put to some use.

2) It’s not just the big cities that have all this excess land lying unused. Even a place like Ooty, has acres and acres of land lying unused thanks to the Hindustan Photo Films Manufacturing Company Ltd., which is largely not functional. There are quite a few such public sector enterprises which are no longer relevant, all across the country.

Given this, one of the first things that the government needs to do is to make an inventory of all this land and put it up in the public domain on a website. It needs to do so with all the other assets that it plans to monetise as well.

Of course, this inventory is not going to be made overnight and will take time. But it is important that this is done in the most transparent way, given that corruption/crony capitalism and land/asset sales, almost go hand in hand.

This is even more important because the government considers this route as an important source of revenue in the years to come. As the finance minister said in the budget that over the years the government hopes to earn more money “by increased receipts from monetisation of assets, including Public Sector Enterprises and land”. Hence, getting the process right is very important.

This becomes even more important given that there will be great opposition to the process from those who benefit from the status quo and even otherwise. The government selling its assets to raise money to do other things is not seen as a good thing. Hence, even a hint of corruption or any other controversy can threaten to derail the entire process, something the government cannot afford at this point of time.

3) In cases where the land was taken from state governments to start a public sector enterprise, it is important that the land be returned to the state government and let the state government decide what it wants to do with it. In the years to come, state governments will also be running short of money to meet their expenditure.

Also, this is the right thing to do. The state government can also use the land to attract more investment into their state. In some cities where there aren’t enough public parks, some land can even go to develop such infrastructure. The aim shouldn’t be to maximise the money earned all the time, but maximise the general well-being.

Again, this is something that will need some amount of thinking and the government’s thinking on this should be clear and out in the public domain.

4) There is another factor that needs to be kept in mind here. Real estate prices in most big Indian cities have remained and continue to remain high. One of the major reasons for this lies in the fact that the land prices remain expensive across Indian cities. Hence, it is important that some of this land be sold to build affordable housing. Only if land prices come down, will home prices come down.

And by affordable housing I mean homes which can be sold profitably in the range of Rs 10-20 lakh per unit and not affordable housing as the way the RBI defines it, which isn’t really affordable housing at all, but just a fancy moniker to help banks meet their priority lending targets.

Other than helping people buy affordable homes to live in, the real estate sector has the ability to create a large number of jobs very quickly. It also has the capability to have a multiplier effect across many other sectors. Building real estate requires cement, sand, steel, bricks, pipes, etc., and so on. Once real estate has been built in, moving into a home requires its own set of purchases. Buying homes also gives a fillip to the home loan business. And of course, people living in homes they own, enhances general well-being.

5) Finally, it is important that the money earned through this route be used for a specific purpose and not just for bringing down the fiscal deficit, which has ballooned to Rs 18.49 lakh crore or 9.5% of the gross domestic product (GDP) this year. Even in 2021-22, the fiscal deficit target has been set at a high Rs 15.07 lakh crore or 6.8% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends and is expressed as a percentage of the GDP.

It is important that money coming from land sales be allocated towards specific infrastructure projects, preferably in the very state where land is being sold. This will make it easier to sell this idea to the state governments, whose cooperation is very necessary to make this idea a reality.

To conclude, the monetisation of excess government land in particular and other assets in general, is a good idea. Having said that, it needs to be executed in a proper process driven and transparent way.

This is an updated version of an article that first appeared on Firstpost on February 2, 2021.

Mr Chief Economic Advisor, Printing Money is Always a Bad Idea.

The Economic Survey for 2020-21 was published yesterday. I wrote a summary of the survey titled 10 major points made by the Economic Survey.

It wasn’t possible to even speed-read the whole Survey quickly, hence, I missed out on a few points, and am writing about them here. This piece is a follow up and I strongly recommend that you read the first piece before reading this one.

Let’s look at some important points made in the Survey.

1) The spread of corona has led to a massive economic contraction this year. While the growth is expected to bounce back over the next few years, the impact of this year’s contraction isn’t going to go away in a hurry.

As per the Survey, if India grows by 12% in 2021-22 and 6.5% and 7%, in 2022-23 and 2023-24, respectively, the Indian economy will be at around 91.5% of where it would have possibly been if there would have been no covid and no economic contraction, and India would have continued to grow at 6.7% per year on an average, as it has in the five years before 2020-21.

At 10% growth in 2021-22, and 6.5% and 7% growth in 2022-23 and 2023-24, respectively, the Indian economy will be at around 90% of where it could have possibly been, the Survey points out.

This is an important point that we need to understand. While, 2021-22 might see a double digit growth, covid has put us back by more than half a decade, if we look at trend growth.

2) The Economic Survey recommends money printing to finance higher government expenditure. Call me old school, but I always feel uncomfortable when economists recommend outright money printing to fund government expenditure. Of course, there is always a theoretical argument on offer.

The Survey refers to a speech made by Patrick Bolton, a professor of business at Columbia University in New York, to make the money printing argument and why money printing, where an excess amount of money chases a similar amount of goods and services, doesn’t always lead to inflation.

As the Survey points out:

“Printing more money can result in inflation and loss of purchasing power for domestic residents if the increase in money supply is larger than the increase in output….Printing more money does not necessarily lead to inflation and a debasement of the currency. In fact, if the increased money supply creates a disproportionate increase in output because the money is invested to finance investment projects with positive net present value.”

What does this mean in simple English? The Survey is essentially saying that if the printed money is well utilised and put into projects which are beneficial for the society, it benefits everyone, and doesn’t lead to inflation.

The trouble is a lot of things sound good in theory. One of the major things that the bad loans crisis of Indian banks teaches us is that the Indian system cannot take a sudden increase in investments. There is only so much that it can handle and that’s primarily because there is too much red tapism and bureaucracy involved in getting any investment project going. We are still dealing with the fallout of this a decade later.

Also, how do the government and bureaucrats ensure that the amount of money being printed is just enough and will not lead to inflation. (Central planning keeps coming back in different forms).

The government can print money and spend it. This can ensure one round of spending and the money will land up in the hands of people. Also, as men spend money, this money will land up with shopkeepers and businesses all over the country. The shopkeepers may hold back some of the cash that they earn depending on their needs.

The chances are that most of this money will be deposited back into bank accounts. In the normal scheme of things, the banks would lend this money out. In difficult times, banks are reluctant to lend. Hence, they end up depositing this money with the RBI. The RBI pays interest on this money. As of yesterday, banks had deposited Rs 5.6 lakh crore with the RBI. This is money they have no use for, or to put it in technical terms, this is the excess liquidity in the system.

Money printing will only add to this excess liquidity. Ultimately, for the economy to do well, people and corporates need to be in a state of mind to borrow and banks in the mood to lend. Printing money cannot ensure that.

Over and above this, money printing can and has led to massive financial and real estate bubbles, in the past few decades. This is asset price inflation. While this inflation doesn’t reflect in the normal everyday consumer price inflation, it is a form of inflation at the end of the day. And whenever such bubbles burst, which they eventually do, it creates its own set of problems.

Given these reasons, the chief economic advisor Krishnamurthy Subramanian’s recommendation of money printing by the government is a lazy idea which hasn’t been thought through. (For a detailed argument against money printing, please read this).


3) During the course of this financial year, banks have gone easy on borrowers who haven’t been in a position to repay.

Technically, this is referred to as regulatory forbearance. In this case, the central bank, comes up with rules and regulations which basically allows banks to treat borrowers in trouble with kids gloves. One of the learnings from the bad loans crisis of banks has been that regulatory forbearance of the Reserve Bank of India, India’s central bank, went on for too long.

The banks are yet to face the negative impact of the covid led contraction primarily because of regulatory forbearance. The banking system should be facing the first blows of the economic contraction. But that hasn’t happened, thanks to the Supreme Court and regulatory forbearance. The Supreme Court, in an interim order dated September 3, 2020, had directed the banks that loan accounts which hadn’t been declared as a bad loan as of August 31, shall not be declared as one, until further orders. Hence, the balance sheets of banks as revealed by their latest quarterly results, seem to be too good to be true.

The Survey suggests that an asset quality review of the balance sheets of banks may be in order. As it points out: “A clean-up of bank balance sheets is necessary when the forbearance is discontinued… An asset quality review exercise must be conducted immediately after the forbearance is withdrawn.”

This is one of the few good suggestions in the Survey this year and needs to be acted on quickly, so as to reveal the correct state of balance sheets of banks. The Survey further points out: “The asset quality review must account for all the creative ways in which banks can evergreen their loans.” Evergreening involves giving a new loan to the borrower so that he can pay the interest on the original loan or even repay it. And then everyone can just pretend that all is well.

In fact, even while making a suggestion for an asset quality review, the Survey takes potshots at Raghuram Rajan and the asset quality review he had initiated as the RBI governor in mid 2015.

4) Another point made in the Survey is to ignore the credit ratings agencies and their Indian ratings. As the Survey points out: “The Survey questioned whether India’s sovereign credit ratings reflect its fundamentals, and found evidence of a systemic under-assessment of India’s fundamentals as reflected in its low ratings over a period of at least two decades.”

This leads the Survey to conclude: “India’s fiscal policy must, therefore, not remain beholden to such a noisy/biased measure of India’s fundamentals and should instead reflect Gurudev Rabindranath Thakur’s sentiment of a mind without fear.”

While invoking Tagore, the Survey basically recommends that India’s government borrows more money to spend, taking into account “considerations of growth and development rather than be restrained by biased and subjective sovereign credit ratings”. (On a slightly different note, who would have thought that one day an economist would invoke Rabindranath Thakur’s name to market higher government borrowing).

Whether, the ratings agencies correctly rate India based on its fundamentals is one issue, whereas, whether it makes sense for India to ignore these ratings and borrow more, is another.

As the Survey points out: “While sovereign credit ratings do not reflect the Indian economy’s fundamentals, noisy, opaque and biased credit ratings damage FPI flows.” (FPI = foreign portfolio inflows).

What this means is that any further cut in credit rating can impact the amount of money being brought in by the foreign investors into India’s stock and bond market. In particular, it can impact the long-term money being brought in by pension funds.

While, the Survey doesn’t say so, it can possibly impact even foreign direct investment.

So, the point is, why take unnecessary panga, for the lack of a better word, with the rating agencies, at a point where the economy is anyway going through a tough time.

In another part, the Survey points out: “Debt levels have reached historic highs, making the global economy particularly vulnerable to financial market stress.”

5) Given that, tax revenues have collapsed, government borrowing money to finance expenditure has gone up dramatically during the course of this year. As the Survey points out:

“As on January 8, 2021, the central government gross market borrowing for FY2020-21 reached Rs 10.72 lakh crore, while State Governments have raised Rs 5.71 lakh crore. While Centre’s borrowings are 65 per cent higher than the amount raised in the corresponding period of the previous year, state governments have seen a step up of 41 per cent. Since the COVID-19 outbreak depressed growth and revenues, a significant scale up of borrowings amply demonstrates the government’s commitment to provide sustained fiscal stimulus [emphasis added] by maintaining high public expenditure levels in the economy.”

Fiscal stimulus is when the government spends more money in order to pump up the economy in a scenario where individuals and corporates are going slow on spending. The total government spending during April to November 2020 stood at Rs 19.1 lakh crore. It has risen by just 4.9% in comparison to April to November 2019. Given that inflation has stood at more than 6% this year, this can hardly be called a fiscal stimulus.

To conclude, economic surveys in the past, other than offering a detailed assessment on the current state of the Indian economy, also used to do some solid thinking about the future or stuff that needs to be done on the economic front.

Over the past few years, a detailed reading of these Surveys suggests that they have become yet another policy document which feeds into government’s massive propaganda machinery, albeit in a slightly sophisticated way.