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Bimal Jalan Committee Recommendations: Why it is a step in the right direction but still inadequate

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Saurabh Patelhttp://www.saurabhpatel.in
Slave of the Big4, master of finance, and a user of Oxford commas

Imagine the horrors if a stingy family patriarch sits on his bank FDs while starving the already malnourished child of the family. An inexplicably unpleasant situation that should never arise you say? Well, then neither should RBI be hoarding excess reserves while the Indian economy stutters to a stand-still with a paucity of investments. Unfortunately, though, we may soon find the usual suspects crying a river over Modi government impinging the sovereignty of institutions with the recent RBI Central Board accepting the recommendations of the Bimal Jalan Committee for surplus transfer to the government.

This acceptance gives the government a bonus transfer of Rs. 86,000 crores over and above the budgeted Rs. 90,000 crores, and hence there are bound to be voices alleging a pliant RBI with a “Modi Man” at its helms bowing down to the government pressure of loosening its purse and compromising the steadfast hawkish stance that a central bank should be taking. There will also be opinions floated that such a step combined with good monsoon can create inflationary pressures and give the government leeway for its ill-thought-out plans like reviving BSNL.

Some of the noise in the guise of “well-founded” concerns is guaranteed to be due to the potential of government’s enhanced spending power creating a stimulus that could derail the fledgeling economic slowdown narrative. It is in this backdrop that it’s imperative to lay bare some facts on the issue:

Independence of RBI: It’s no secret that every Modi appointee has had to face the ire of liberal media as a Sanghi plant. This was true for Urijit Patel who went from being an Ambani mole (damaad?) in the RBI to the epitome of impartiality during the length of his truncated tenure and is also true for Shaktikanta Das who is seen to be more pliant than his predecessor. The current set of recommendations that enables this payout, however, comes from a committee of six experts headed by ex-Governor Bimal Jalan. While we are going to see later in the article how not all the recommendations are music to the Government’s ears, Bimal Jalan himself is anything but a Modi’s Man.

The recommendation: The panel has recommended a range of 5.5%-6.5% of the total balance sheet size to be maintained for Contingent Risk Buffer (CRB). A quick look at the contingency fund (Schedule 3 (i) on page 206) tells us that the reserves RBI holds are already more than sufficient to tide over any rate hike (which will devalue RBI’s current holding of US Bonds) by US Fed, hence at a time when President Trump is asking for rate cut (which will result in a higher valuation of the US bonds we already hold), RBI doesn’t really need to be increasing its Contingency Fund. This means that the proposed CRB range doesn’t warrant the doubts cast by India’s Ex-Chief Statistician here.

Conventional Wisdom: The rule of thumb says corporates borrow in the debt market when they say to see the opportunity to invest in productive assets and earn a return for their shareholders that is higher than the interest paid on that debt. When they do not see such an opportunity, the treasury department of the company distributes the surplus as dividend or parks the fund in low yield safe assets. While the purpose of RBI is not to earn any kind of stipulated return for its shareholders, but if there are opportunities to earn a higher return for the government than the meagre 1-2% coupons of US bonds, by investing in our growing economy’s capital assets, common sense dictates that a part of such reserves can easily be parted with.

Could the Jalan Committee have done more? In a way yes. We see the Currency and Gold Revaluation Account (CGRA) increased from Rs. 5.3 trillion to almost Rs. 7.0 trillion years on year for 2018 (Schedule 3 (i) on page 206). The CGRA reserve is created as a provision to safeguard against any drastic devaluation in the US dollar (or gold) reserves we hold. The committee has observed that this reserve once created cannot be cancelled to be used as a payout to the government. In their words

“There was only a one-way fungibility (between them) which implies that while a shortfall, if any, in revaluation balances vis-à-vis market risk provisioning requirements could be met through increased risk provisioning from net income, the reverse, i.e., the use of surplus in revaluation balances over market risk provisioning requirements for covering shortfall in provisions for other risks is not permitted.”

This essentially means the reserves (which already have ballooned to an amount which may not be justified given the stability in US economy) is going to keep on increasing till there is a next committee that realises and accepts (to the policy hawk’s chagrin) that we might be being over cautious. But that remains a battle for another time.

For now, we can sit back and hope the government utilises the funds to tide over the NBFC crisis and recapitalise our battered banks, which will result in a much-needed credit offtake revitalising private sector investments.

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Saurabh Patelhttp://www.saurabhpatel.in
Slave of the Big4, master of finance, and a user of Oxford commas
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