GS-III: Spelling out the government’s RBI windfall

News

The transfer of Reserve Bank Of India surplus to the government in a routine manner.

• The government was, it must be noted, acting on the recommendations of a committee chaired by former RBI governor Bimal Jalan, on capital transfer.
• Some economists have welcomed the move as it will help the government counter the shortfall in revenue and tax collection.
• Since inflationary pressure is low, economists believe that the move will not have a negative impact in the long run.
• Another group of economists which includes the likes of Raghuram Rajan and former RBI governor Urjit Patel said earlier that the move could put RBI in a vulnerable position apart from diminishing its autonomy.

Bimal Jalan committee Recommendations:

• The surplus from the central bank comprised two components-Rs 1.23 lakh crore of surplus for the year 2018-19 and an additional Rs 52,637 crore of excess provisions that was made available as per the revised economic capital framework recommended by the Bimal Jalan committee.
• Of the Rs 1.23 lakh crore, the RBI has already transferred Rs 28,000 crore to the government in the previous fiscal, which will reflect in RBI’s upcoming annual report.
• It suggested that the framework may be periodically reviewed after every five years.
• It is recommended to align the central bank’s accounting year with the financial year, which could reduce the need for paying interim dividends.
• The panel recommended clear distinction between the two components of economic capital, realised equity and revaluation balances. This is because of the volatile nature of the revaluation reserves.
• Jalan committee has given a range of 5.5-6.5% of RBI's balance sheet for Contingent Risk Buffer.
• Revaluation gains from market fluctuations on foreign currency, gold or other assets must be retained. Revaluation balances were not distributable.
• Hence bulk of RBI’s legacy reserves are ring-fenced from transfer demands.
• The Bimal Jalan committee should also be complimented for clearly specifying that the revaluation reserve cannot be used to bridge shortfalls in other reserves.

• Economic Capital Framework

• The RBI had formed a committee chaired by former Governor Bimal Jalan to review its economic capital framework and suggest the quantum of excess provision to be transferred to the government.
• The panel recommended a clear distinction between the two components of the economic capital of RBI i.e. Realized equity and Revaluation balances.
• Revaluation reserves comprise of periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.
• Realized equity, is a form of a contingency fund for meeting all risks/losses primarily built up from retained earnings. It is also called the Contingent Risk Buffer (CBR).

Every year RBI transfer the surplus to the government:

• RBI is not a commercial organisation like banks and other companies owned or controlled by the government to pay a dividend to the owner out of the profit generated.
• What the RBI does is transfer the surplus excess of income over expenditure to the government.
• Under Section 47 of the RBI Act, “after making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and for all other matters for which provision is to be made by or under this Act or which are usually provided for by bankers, the balance of the profits shall be paid to the Central government”.

What are the sources from, RBI generate money?

A significant part comes from RBI’s operations in financial markets:

• It intervenes for instance to buy or sell foreign exchange.
• Open Market operations, when it attempts to prevent the rupee from appreciating.
• As income from government securities it holds.
• As returns from its foreign currency assets that are investments in the bonds of foreign central banks or top-rated securities.
• From deposits with other central banks or the Bank for International Settlement or BIS.
• Besides lending to banks for very short tenures and management commission on handling the borrowings of state governments and the central government.
• RBI buys these financial assets against its fixed liabilities such as currency held by the public and deposits issued to commercial banks on which it does not pay interest.

Conclusion:

Normally, the money is transferred to the Consolidated Fund of India from which salaries and pensions to government employees are paid and interest payments done, besides spending on government programmes. The large payout can help the government cut back on planned borrowings and keep interest rates relatively low. Besides, it will provide space for private companies to raise money from markets. And if it manages to meet its revenue targets, the windfall gain can lead to a lower fiscal deficit.

GS-III: Australia downgrade the Great Barrier Reef to ‘very poor’ status

News

Australia’s Great Barrier Reef is in very poor condition because of climate change.

What is Coral Bleaching?

Bleaching occurs when abnormal environmental conditions, such as warmer sea temperatures, cause corals to expel tiny photosynthetic algae, draining them of their colour. Corals can recover if the water temperature drops and the algae are able to recolonise them.

About the Great barrier reef:

• The Great Barrier Reef is the world’s largest coral reef system composed of over 2,900 individual reefs and 900 islands stretching for over 2,300 kilometres over an area of approximately 344,400 square kilometres. The reef is located in the Coral Sea, off the coast of Queensland, Australia.
• The Great Barrier Reef can be seen from outer space and is the world’s biggest single structure made by living organisms. This reef structure is composed of and built by billions of tiny organisms, known as coral polyps. It was selected as a World Heritage Site in 1981.

Why Great Barrier Reef Graded?

Global warming is destroying the Great Barrier Reef’s ability to recover from disasters and reducing its biodiversity by changing the species that live there. The decline is bad news for the reef’s long-term future. It is also changing the mix of coral species that replenish the reef, which will reduce the number of suitable habitats for marine life. For the first time, the recruitment of a group of weedy corals, known as brooding pocilloporids, outstripped spawning acroporids, a type of coral that is vital for giving a reef the three-dimensional complexity that many animals rely on. Losing some of that three-dimensionality means a loss of biodiversity, in coral species and other marine life.

Conclusion

The Great Barrier Reef can be seen from outer space and is the world’s biggest single structure made by living organisms. This reef structure is composed of and built by billions of tiny organisms, known as coral polyps. It was selected as a World Heritage Site in 1981.