Indian centra bank profits Rs. 2.11 tn to Govt - Lost independence?

 


Article's Background

According to a news article published in the CNBC financial web (Read article here) on 22 May 2024, the Board of Indian central bank (Reserve Bank of India - RBI) has approved a whopping Rs. 2.11 trillion of profit transfer to the government for the financial year ended 31 March 2024.

However, Sri Lankan central bank board has approved a profit transfer to the government for the year 2023 as a loss of Rs. 314 bn. as against the reported financial loss of Rs. 114 bn.

Therefore, this short article is to compare the profit transfers of the two central banks and underlying issues.

RBI profit transfer to govt. - Key points in the article 

  • The profit transfer of the RBI to the government for the year 2023/24 is Rs. 2.11 tn as compared to Rs. 874.16 bn for the last year.

  • The government had budgeted Rs. 1.02 tn of dividend income from RBI and other state owned banks and financial institutions.

  • Analysts had expected a RBI profit transfer in the range of Rs. 750 bn - 1.2 tn.

  • Higher profit transfer represents an additional fiscal revenue of 0.4% of GDP.

  • According to an analyst, higher interest rates on both domestic and foreign securities, significantly higher gross sale of foreign exchange and little impact from the central bank’s liquidity/monetary operations have led to such a whopping dividend payment.

Contents of this article cast doubts on the financial independence of the RBI because the government budgets the RBI profit as part of dividend income in the budget. Instead, Sri Lankan government has to satisfy with what ever profit estimated and approved by its central bank. According to new central bank law, nobody can intervene or influence in central bank policies.

Sri Lankan central bank profit transfer for 2023

Relevant points in financial statements published by the central bank under new legislation are as follows.

  • The profit transferable to the government was a loss of Rs. 314 bn for 2023 whereas nothing was transferred out of the distributable profit of Rs. 235 bn in 2022.

  • The financial loss of the central bank was Rs. 114.4 bn in 2023 as against the loss of Rs. 374.3 bn in 2022.

  • The transferable profit is estimated by taking out unrealized/book-keeping profit (loss) from the reported profit in the financial statements that are prepared in terms of European Accounting Standards for financial business enterprises.

  • However, this year's calculation of distributable profit has not deducted an unrealized loss of Rs. 766.4 bn incurred in restructuring of central bank loans granted to the government (loss due to so-called market valuation of new bonds issued to the central bank).

  • If the due deduction is applied, the profit transferable to the government is Rs. 452 bn. It is a 1.6% of GDP which should have raised the fiscal revenue/GDP ratio to 12.6%.
Observations

  • The RBI does not take unrealized gains/loss (such as revaluations of foreign reserve assets at new exchange rates) into income and profit in contrast to Sri Lankan central bank.

  • Therefore, all profit of the RBI is actually realized profit in cash which is known as seigniorage or profit on money printing.

  • Almost all RBI profit is distributed to the government. In 2023, out of profit Rs. 874.202 bn, Rs. 874.162 bn was transferred to the government.

  • In an alleged attempt to retain profit in the RBI in 2018, the Governor had to step down to resolve the conflict between the government and RBI. In 2016, internationally renowned economist Raghuram Rajan left the post of RBI Governor in one term due to policy conflicts with the government.

  • Accordingly, a doubt arises whether the RBI is an independent central bank from Sri Lankan and IMF point of view.

  • However, the national role played by the RBI in debt management, foreign reserve management, foreign exchange management, monetary and credit management and bank and non-bank regulation in the best interest of the economy and livings standards of a developing country since its nationalization in 1949 is exemplary.

  • In contrast, Sri Lankan central bank has been awarded with full independence through brand new legislation in 2023 after the default of all its national functions in 2022 that has caused the national economic crash.

  • Sri Lankan central bank following dubious financial accounting and misreporting profit will be a threat to the country's financial stability and fiscal sustainability unless the government oversees outcomes, policies and standards of central bank financial operations. It is not best interest of the economy and general public if the central bank is free to print money, spend and report financial outcomes in the manner few individuals of the central bank wish. The government has already learnt a lesson from the central bank's colossal wage hike in February falling malaciusly behind the independence that shocked the economy and labour market.

This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures. All are personal views of the author based on his research in the subject of Economics which have no intension to personally or maliciously discredit characters of any individuals.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published.  


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