Economy: May 2021 Current Affair | Indian Economy for State PSC Exams - BPSC (Bihar) PDF Download

 Page 1


	
23																																																																																
3.	ECONOMY	
3.1.	STATE	FINANCES	
Why in news? 
Recently, Government has issued fresh guidelines on the ‘Scheme of Financial Assistance to States for Capital 
Expenditure’ for the financial year 2021–22. 
More on news  
• Under the Scheme, financial assistance is provided to the State Governments in the form of 50-year 
interest free loan.  
o An amount not exceeding Rs.12,000 crore was earmarked for the scheme for the financial year 2020-21.   
o This helped to sustain state level capital expenditure in the pandemic year. 
o Capital expenditure creates employment, especially for the poor and unskilled, has a high multiplier 
effect, enhances the future productive capacity of the economy, and results in a higher rate of economic 
growth. 
• Central Government has now decided to continue the scheme in the year 2021-22.                  
 
Importance of State Finance 
• Employment: States now spend one-and-a-half times more than the Union government and employ five 
times more people than the Centre. Not only do states have a greater role to play in determining India’s 
GDP than the Centre, but they are also the bigger employment generators. 
• Macroeconomic Stability: Amid the pandemic, states have heavily borrowed from market and high 
borrowings by states has serious implications on the interest rates charged in the economy, the availability 
of funds for businesses to invest in new factories, and the ability of the private sector to employ new labor. 
• Debt Sustainability: In wake of high debt-to-GDP ratio amidst Pandemic, inability of states to raise revenue 
could start a vicious cycle wherein states end up paying more and more towards interest payments instead 
of spending their revenues on creating new assets that provide better education, health and welfare for 
their residents. 
Page 2


	
23																																																																																
3.	ECONOMY	
3.1.	STATE	FINANCES	
Why in news? 
Recently, Government has issued fresh guidelines on the ‘Scheme of Financial Assistance to States for Capital 
Expenditure’ for the financial year 2021–22. 
More on news  
• Under the Scheme, financial assistance is provided to the State Governments in the form of 50-year 
interest free loan.  
o An amount not exceeding Rs.12,000 crore was earmarked for the scheme for the financial year 2020-21.   
o This helped to sustain state level capital expenditure in the pandemic year. 
o Capital expenditure creates employment, especially for the poor and unskilled, has a high multiplier 
effect, enhances the future productive capacity of the economy, and results in a higher rate of economic 
growth. 
• Central Government has now decided to continue the scheme in the year 2021-22.                  
 
Importance of State Finance 
• Employment: States now spend one-and-a-half times more than the Union government and employ five 
times more people than the Centre. Not only do states have a greater role to play in determining India’s 
GDP than the Centre, but they are also the bigger employment generators. 
• Macroeconomic Stability: Amid the pandemic, states have heavily borrowed from market and high 
borrowings by states has serious implications on the interest rates charged in the economy, the availability 
of funds for businesses to invest in new factories, and the ability of the private sector to employ new labor. 
• Debt Sustainability: In wake of high debt-to-GDP ratio amidst Pandemic, inability of states to raise revenue 
could start a vicious cycle wherein states end up paying more and more towards interest payments instead 
of spending their revenues on creating new assets that provide better education, health and welfare for 
their residents. 
	
24	 																																																																										
Issues with State 
Finance 
• Shortfall in tax 
collections: Data 
suggest that there is 
fall in gross tax 
collections of Union 
Government by 1.5% 
of gross domestic 
product. Within this, 
states are hit harder 
with the shortfall in 
tax revenues for 
states. (Refer 
infographic).  
• Goods and Services Tax 
(GST), the main source of 
tax revenue for the states, 
have witnessed a 15-25 per 
cent lower tax revenue 
collection in 2020-21. 
• Lowering Share of States in 
divisible pool: Due to over-
reliance of Centre on Cess 
and Surcharges, the share 
of states in the Centre’s 
gross tax revenue (GTR) fell 
sharply from 36.6% in FY19 
to 32.4% in FY20.  
• Increased reliance on 
borrowing: During the 
2015-21 period, 20% of the 
total expenditure of states 
has been met through 
borrowings with some 
states like Punjab (45%), 
Haryana (30%), and West 
Bengal (30%) relying 
heavily on borrowings to 
meet their expenses. 
o Recently, Reserve Bank 
of India has warned about rising public debt at state-level. 
Public debt as a share of states’ own revenue has 
increased since 2014. 
• Populism: Political class has the tendency towards 
expansionary fiscal policy, which increases burden on future 
Governments and thus, has detrimental long-run impacts 
e.g., loan waivers to farmers. 
• Deteriorating financial situation of discoms: More than 60% 
of the total outstanding guarantees given by state 
governments is for power sector companies. The risk for 
invocation of these guarantees could further rise in near 
future, owing to continuing losses and an increase in the 
outstanding debt of discoms poses a systemic risk to the States’ finances. 
Page 3


	
23																																																																																
3.	ECONOMY	
3.1.	STATE	FINANCES	
Why in news? 
Recently, Government has issued fresh guidelines on the ‘Scheme of Financial Assistance to States for Capital 
Expenditure’ for the financial year 2021–22. 
More on news  
• Under the Scheme, financial assistance is provided to the State Governments in the form of 50-year 
interest free loan.  
o An amount not exceeding Rs.12,000 crore was earmarked for the scheme for the financial year 2020-21.   
o This helped to sustain state level capital expenditure in the pandemic year. 
o Capital expenditure creates employment, especially for the poor and unskilled, has a high multiplier 
effect, enhances the future productive capacity of the economy, and results in a higher rate of economic 
growth. 
• Central Government has now decided to continue the scheme in the year 2021-22.                  
 
Importance of State Finance 
• Employment: States now spend one-and-a-half times more than the Union government and employ five 
times more people than the Centre. Not only do states have a greater role to play in determining India’s 
GDP than the Centre, but they are also the bigger employment generators. 
• Macroeconomic Stability: Amid the pandemic, states have heavily borrowed from market and high 
borrowings by states has serious implications on the interest rates charged in the economy, the availability 
of funds for businesses to invest in new factories, and the ability of the private sector to employ new labor. 
• Debt Sustainability: In wake of high debt-to-GDP ratio amidst Pandemic, inability of states to raise revenue 
could start a vicious cycle wherein states end up paying more and more towards interest payments instead 
of spending their revenues on creating new assets that provide better education, health and welfare for 
their residents. 
	
24	 																																																																										
Issues with State 
Finance 
• Shortfall in tax 
collections: Data 
suggest that there is 
fall in gross tax 
collections of Union 
Government by 1.5% 
of gross domestic 
product. Within this, 
states are hit harder 
with the shortfall in 
tax revenues for 
states. (Refer 
infographic).  
• Goods and Services Tax 
(GST), the main source of 
tax revenue for the states, 
have witnessed a 15-25 per 
cent lower tax revenue 
collection in 2020-21. 
• Lowering Share of States in 
divisible pool: Due to over-
reliance of Centre on Cess 
and Surcharges, the share 
of states in the Centre’s 
gross tax revenue (GTR) fell 
sharply from 36.6% in FY19 
to 32.4% in FY20.  
• Increased reliance on 
borrowing: During the 
2015-21 period, 20% of the 
total expenditure of states 
has been met through 
borrowings with some 
states like Punjab (45%), 
Haryana (30%), and West 
Bengal (30%) relying 
heavily on borrowings to 
meet their expenses. 
o Recently, Reserve Bank 
of India has warned about rising public debt at state-level. 
Public debt as a share of states’ own revenue has 
increased since 2014. 
• Populism: Political class has the tendency towards 
expansionary fiscal policy, which increases burden on future 
Governments and thus, has detrimental long-run impacts 
e.g., loan waivers to farmers. 
• Deteriorating financial situation of discoms: More than 60% 
of the total outstanding guarantees given by state 
governments is for power sector companies. The risk for 
invocation of these guarantees could further rise in near 
future, owing to continuing losses and an increase in the 
outstanding debt of discoms poses a systemic risk to the States’ finances. 
	
25	 																																																																								
• Shortfall in GST compensation: Shortfall in a state’s GST collection is compensated by the Centre and funded 
through a Cess. Low Cess collection and high compensation requirement have resulted in shortfall of GST 
compensation to states. (Refer infographics) 
These issues were compounded due to the outbreak of the pandemic and the associated economic recession.  
Steps taken to improve State Finance in the wake of COVID-19 
• Raised Borrowing Limits: The Centre has raised borrowing limits for states for the current fiscal to 5% of 
gross state domestic product (GSDP) from 3% at present, allowing them fiscal headroom of around Rs. 4 
trillion, subject to their carrying out specific reforms. 
• RBI measures: To enable the State Governments to better manage their fiscal situation in terms of their 
cash-flows and market borrowings, certain relaxations are being permitted with regard to availment of 
Overdraft (OD) facilities.  
o Accordingly, the maximum number of days of OD in a quarter is being increased from 36 to 50 days and 
the number of consecutive days of OD from 14 to 21 days.  
o The Ways and Means Advance (WMA) limits of states have been enhanced. 
• Health Sector: The Central government has released around Rs. 80,000 crore to the States under National 
Health Mission (NHM) as grants. 
Way forward to boost State’s Financial Management in the long term  
• Recommendations of 15
th
 Finance Commission 
o It has recommended that both central and state governments should focus on debt consolidation and 
comply with the fiscal deficit and debt levels as per their respective Fiscal Responsibility and Budget 
Management (FRBM) Acts. 
o It recommended that both the central and state governments should make full disclosure of extra-
budgetary borrowings and these liabilities should be clearly identified and eliminated in a time-bound 
manner. 
o The Commission recommended broadening the tax base, streamlining tax rates, and increasing 
capacity and expertise of tax administration in all tiers of the government. 
• Post-pandemic fiscal response by states: Re-prioritizing expenditures towards more productive high 
multiplier capital projects has to be made center stage.  
o Investing in health care systems and social safety nets in line with the states’ demographic and co-
morbid profiles and strengthening urban infrastructure have to be an integral part of the fiscal strategy. 
• Debt Management: Like the Centre, states may also consider revising their fiscal legislations by bringing in 
the desired counter-cyclicality and by incorporating debt as a medium-term anchor. 
• Low reliance on Cess & Surcharges: According to Vidhi Centre for Legal Policy, all cesses in force for a long 
duration or where there is evidence of non-utilization and diversion of funds should be abolished. 
o In future, cesses should be imposed for a narrowly defined purpose and with a clear estimation of the 
amount of money that the Union government aims to raise through the cesses. 
• GST Compensation: The long-term solution to the compensation issue lies in fostering greater economic 
growth. The GST Council must routinely relook some of the tax changes it proposes and put them to test, 
with focus on economic growth rather than effect on revenues in mind. 
3.2.	RBI	SURPLUS	TRANSFER	
Why in News? 
Recently, the Reserve Bank of India (RBI) approved the transfer of ?99,122 crore as surplus (excess of income 
over expenditure) to the central government from its reserves. 
 
 
 
 
 
Page 4


	
23																																																																																
3.	ECONOMY	
3.1.	STATE	FINANCES	
Why in news? 
Recently, Government has issued fresh guidelines on the ‘Scheme of Financial Assistance to States for Capital 
Expenditure’ for the financial year 2021–22. 
More on news  
• Under the Scheme, financial assistance is provided to the State Governments in the form of 50-year 
interest free loan.  
o An amount not exceeding Rs.12,000 crore was earmarked for the scheme for the financial year 2020-21.   
o This helped to sustain state level capital expenditure in the pandemic year. 
o Capital expenditure creates employment, especially for the poor and unskilled, has a high multiplier 
effect, enhances the future productive capacity of the economy, and results in a higher rate of economic 
growth. 
• Central Government has now decided to continue the scheme in the year 2021-22.                  
 
Importance of State Finance 
• Employment: States now spend one-and-a-half times more than the Union government and employ five 
times more people than the Centre. Not only do states have a greater role to play in determining India’s 
GDP than the Centre, but they are also the bigger employment generators. 
• Macroeconomic Stability: Amid the pandemic, states have heavily borrowed from market and high 
borrowings by states has serious implications on the interest rates charged in the economy, the availability 
of funds for businesses to invest in new factories, and the ability of the private sector to employ new labor. 
• Debt Sustainability: In wake of high debt-to-GDP ratio amidst Pandemic, inability of states to raise revenue 
could start a vicious cycle wherein states end up paying more and more towards interest payments instead 
of spending their revenues on creating new assets that provide better education, health and welfare for 
their residents. 
	
24	 																																																																										
Issues with State 
Finance 
• Shortfall in tax 
collections: Data 
suggest that there is 
fall in gross tax 
collections of Union 
Government by 1.5% 
of gross domestic 
product. Within this, 
states are hit harder 
with the shortfall in 
tax revenues for 
states. (Refer 
infographic).  
• Goods and Services Tax 
(GST), the main source of 
tax revenue for the states, 
have witnessed a 15-25 per 
cent lower tax revenue 
collection in 2020-21. 
• Lowering Share of States in 
divisible pool: Due to over-
reliance of Centre on Cess 
and Surcharges, the share 
of states in the Centre’s 
gross tax revenue (GTR) fell 
sharply from 36.6% in FY19 
to 32.4% in FY20.  
• Increased reliance on 
borrowing: During the 
2015-21 period, 20% of the 
total expenditure of states 
has been met through 
borrowings with some 
states like Punjab (45%), 
Haryana (30%), and West 
Bengal (30%) relying 
heavily on borrowings to 
meet their expenses. 
o Recently, Reserve Bank 
of India has warned about rising public debt at state-level. 
Public debt as a share of states’ own revenue has 
increased since 2014. 
• Populism: Political class has the tendency towards 
expansionary fiscal policy, which increases burden on future 
Governments and thus, has detrimental long-run impacts 
e.g., loan waivers to farmers. 
• Deteriorating financial situation of discoms: More than 60% 
of the total outstanding guarantees given by state 
governments is for power sector companies. The risk for 
invocation of these guarantees could further rise in near 
future, owing to continuing losses and an increase in the 
outstanding debt of discoms poses a systemic risk to the States’ finances. 
	
25	 																																																																								
• Shortfall in GST compensation: Shortfall in a state’s GST collection is compensated by the Centre and funded 
through a Cess. Low Cess collection and high compensation requirement have resulted in shortfall of GST 
compensation to states. (Refer infographics) 
These issues were compounded due to the outbreak of the pandemic and the associated economic recession.  
Steps taken to improve State Finance in the wake of COVID-19 
• Raised Borrowing Limits: The Centre has raised borrowing limits for states for the current fiscal to 5% of 
gross state domestic product (GSDP) from 3% at present, allowing them fiscal headroom of around Rs. 4 
trillion, subject to their carrying out specific reforms. 
• RBI measures: To enable the State Governments to better manage their fiscal situation in terms of their 
cash-flows and market borrowings, certain relaxations are being permitted with regard to availment of 
Overdraft (OD) facilities.  
o Accordingly, the maximum number of days of OD in a quarter is being increased from 36 to 50 days and 
the number of consecutive days of OD from 14 to 21 days.  
o The Ways and Means Advance (WMA) limits of states have been enhanced. 
• Health Sector: The Central government has released around Rs. 80,000 crore to the States under National 
Health Mission (NHM) as grants. 
Way forward to boost State’s Financial Management in the long term  
• Recommendations of 15
th
 Finance Commission 
o It has recommended that both central and state governments should focus on debt consolidation and 
comply with the fiscal deficit and debt levels as per their respective Fiscal Responsibility and Budget 
Management (FRBM) Acts. 
o It recommended that both the central and state governments should make full disclosure of extra-
budgetary borrowings and these liabilities should be clearly identified and eliminated in a time-bound 
manner. 
o The Commission recommended broadening the tax base, streamlining tax rates, and increasing 
capacity and expertise of tax administration in all tiers of the government. 
• Post-pandemic fiscal response by states: Re-prioritizing expenditures towards more productive high 
multiplier capital projects has to be made center stage.  
o Investing in health care systems and social safety nets in line with the states’ demographic and co-
morbid profiles and strengthening urban infrastructure have to be an integral part of the fiscal strategy. 
• Debt Management: Like the Centre, states may also consider revising their fiscal legislations by bringing in 
the desired counter-cyclicality and by incorporating debt as a medium-term anchor. 
• Low reliance on Cess & Surcharges: According to Vidhi Centre for Legal Policy, all cesses in force for a long 
duration or where there is evidence of non-utilization and diversion of funds should be abolished. 
o In future, cesses should be imposed for a narrowly defined purpose and with a clear estimation of the 
amount of money that the Union government aims to raise through the cesses. 
• GST Compensation: The long-term solution to the compensation issue lies in fostering greater economic 
growth. The GST Council must routinely relook some of the tax changes it proposes and put them to test, 
with focus on economic growth rather than effect on revenues in mind. 
3.2.	RBI	SURPLUS	TRANSFER	
Why in News? 
Recently, the Reserve Bank of India (RBI) approved the transfer of ?99,122 crore as surplus (excess of income 
over expenditure) to the central government from its reserves. 
 
 
 
 
 
	
26	 																																																																											
How does RBI generate surplus? 
RBI’s Income  RBI’s Expenditure 
RBI’s income primarily comes from:  
• Return from domestic sources which includes 
interest on Loans and Advances, interest on Liquidity 
Adjustment Facility (LAF) operations etc.  
• Other income from domestic sources including 
Profit/Loss on sale and redemption of Rupee 
securities, Commission among others.  
• Return from foreign sources which includes interests 
from foreign currency deposits, interest on 
Repo/Reverse Repo transactions etc. 
• Other income from foreign sources including 
Profit/Loss on sale and redemption of foreign 
securities, Gain/Loss from forex transactions among 
others.  
RBI’s expenditure primarily happens on:  
• Provisioning of risks in RBI’s reserves: Contingency 
Fund (CF) and Asset Development Fund (ADF).  
o Contingency Fund (CF): It is the second biggest fund 
designed to meet contingencies from exchange rate 
operations and monetary policy decisions. 
ü It is funded in large part from the RBI’s profits.  
o Asset Development Fund (ADF): It represents 
provisions made towards investments in 
subsidiaries and associated institutions and to meet 
internal capital expenditure. 
• Printing of notes.  
• Agency charges which includes commission to banks, 
primary dealers etc.  
• Employee cost.  
Overall 
• RBI’s total expenditure is only about 1/7th of its total net interest income, thereby generating surplus.  
How does RBI transfer surplus to the 
government?  
• As RBI is not required to pay income 
tax, it transfers the surplus amount to 
the government. 
• RBI transfers the surplus in accordance 
with Section 47 (Allocation of surplus 
profits) of the Reserve Bank of India 
Act, 1934. 
• In the past, various committees have 
been formed to decide the ideal 
amount of surplus that should be 
transferred to the Central Government. 
These committees were headed by V 
Subrahmanyam in 1997, Usha Thorat in 2004 and Y H Malegam in 2013 and Bimal Jalan in 2018. 
• Earlier, RBI used to keep a major chunk of this surplus for its CF and ADF. However, after the Malegam 
Committee (2013) recommendations its transfer of surplus to government increased. 
Page 5


	
23																																																																																
3.	ECONOMY	
3.1.	STATE	FINANCES	
Why in news? 
Recently, Government has issued fresh guidelines on the ‘Scheme of Financial Assistance to States for Capital 
Expenditure’ for the financial year 2021–22. 
More on news  
• Under the Scheme, financial assistance is provided to the State Governments in the form of 50-year 
interest free loan.  
o An amount not exceeding Rs.12,000 crore was earmarked for the scheme for the financial year 2020-21.   
o This helped to sustain state level capital expenditure in the pandemic year. 
o Capital expenditure creates employment, especially for the poor and unskilled, has a high multiplier 
effect, enhances the future productive capacity of the economy, and results in a higher rate of economic 
growth. 
• Central Government has now decided to continue the scheme in the year 2021-22.                  
 
Importance of State Finance 
• Employment: States now spend one-and-a-half times more than the Union government and employ five 
times more people than the Centre. Not only do states have a greater role to play in determining India’s 
GDP than the Centre, but they are also the bigger employment generators. 
• Macroeconomic Stability: Amid the pandemic, states have heavily borrowed from market and high 
borrowings by states has serious implications on the interest rates charged in the economy, the availability 
of funds for businesses to invest in new factories, and the ability of the private sector to employ new labor. 
• Debt Sustainability: In wake of high debt-to-GDP ratio amidst Pandemic, inability of states to raise revenue 
could start a vicious cycle wherein states end up paying more and more towards interest payments instead 
of spending their revenues on creating new assets that provide better education, health and welfare for 
their residents. 
	
24	 																																																																										
Issues with State 
Finance 
• Shortfall in tax 
collections: Data 
suggest that there is 
fall in gross tax 
collections of Union 
Government by 1.5% 
of gross domestic 
product. Within this, 
states are hit harder 
with the shortfall in 
tax revenues for 
states. (Refer 
infographic).  
• Goods and Services Tax 
(GST), the main source of 
tax revenue for the states, 
have witnessed a 15-25 per 
cent lower tax revenue 
collection in 2020-21. 
• Lowering Share of States in 
divisible pool: Due to over-
reliance of Centre on Cess 
and Surcharges, the share 
of states in the Centre’s 
gross tax revenue (GTR) fell 
sharply from 36.6% in FY19 
to 32.4% in FY20.  
• Increased reliance on 
borrowing: During the 
2015-21 period, 20% of the 
total expenditure of states 
has been met through 
borrowings with some 
states like Punjab (45%), 
Haryana (30%), and West 
Bengal (30%) relying 
heavily on borrowings to 
meet their expenses. 
o Recently, Reserve Bank 
of India has warned about rising public debt at state-level. 
Public debt as a share of states’ own revenue has 
increased since 2014. 
• Populism: Political class has the tendency towards 
expansionary fiscal policy, which increases burden on future 
Governments and thus, has detrimental long-run impacts 
e.g., loan waivers to farmers. 
• Deteriorating financial situation of discoms: More than 60% 
of the total outstanding guarantees given by state 
governments is for power sector companies. The risk for 
invocation of these guarantees could further rise in near 
future, owing to continuing losses and an increase in the 
outstanding debt of discoms poses a systemic risk to the States’ finances. 
	
25	 																																																																								
• Shortfall in GST compensation: Shortfall in a state’s GST collection is compensated by the Centre and funded 
through a Cess. Low Cess collection and high compensation requirement have resulted in shortfall of GST 
compensation to states. (Refer infographics) 
These issues were compounded due to the outbreak of the pandemic and the associated economic recession.  
Steps taken to improve State Finance in the wake of COVID-19 
• Raised Borrowing Limits: The Centre has raised borrowing limits for states for the current fiscal to 5% of 
gross state domestic product (GSDP) from 3% at present, allowing them fiscal headroom of around Rs. 4 
trillion, subject to their carrying out specific reforms. 
• RBI measures: To enable the State Governments to better manage their fiscal situation in terms of their 
cash-flows and market borrowings, certain relaxations are being permitted with regard to availment of 
Overdraft (OD) facilities.  
o Accordingly, the maximum number of days of OD in a quarter is being increased from 36 to 50 days and 
the number of consecutive days of OD from 14 to 21 days.  
o The Ways and Means Advance (WMA) limits of states have been enhanced. 
• Health Sector: The Central government has released around Rs. 80,000 crore to the States under National 
Health Mission (NHM) as grants. 
Way forward to boost State’s Financial Management in the long term  
• Recommendations of 15
th
 Finance Commission 
o It has recommended that both central and state governments should focus on debt consolidation and 
comply with the fiscal deficit and debt levels as per their respective Fiscal Responsibility and Budget 
Management (FRBM) Acts. 
o It recommended that both the central and state governments should make full disclosure of extra-
budgetary borrowings and these liabilities should be clearly identified and eliminated in a time-bound 
manner. 
o The Commission recommended broadening the tax base, streamlining tax rates, and increasing 
capacity and expertise of tax administration in all tiers of the government. 
• Post-pandemic fiscal response by states: Re-prioritizing expenditures towards more productive high 
multiplier capital projects has to be made center stage.  
o Investing in health care systems and social safety nets in line with the states’ demographic and co-
morbid profiles and strengthening urban infrastructure have to be an integral part of the fiscal strategy. 
• Debt Management: Like the Centre, states may also consider revising their fiscal legislations by bringing in 
the desired counter-cyclicality and by incorporating debt as a medium-term anchor. 
• Low reliance on Cess & Surcharges: According to Vidhi Centre for Legal Policy, all cesses in force for a long 
duration or where there is evidence of non-utilization and diversion of funds should be abolished. 
o In future, cesses should be imposed for a narrowly defined purpose and with a clear estimation of the 
amount of money that the Union government aims to raise through the cesses. 
• GST Compensation: The long-term solution to the compensation issue lies in fostering greater economic 
growth. The GST Council must routinely relook some of the tax changes it proposes and put them to test, 
with focus on economic growth rather than effect on revenues in mind. 
3.2.	RBI	SURPLUS	TRANSFER	
Why in News? 
Recently, the Reserve Bank of India (RBI) approved the transfer of ?99,122 crore as surplus (excess of income 
over expenditure) to the central government from its reserves. 
 
 
 
 
 
	
26	 																																																																											
How does RBI generate surplus? 
RBI’s Income  RBI’s Expenditure 
RBI’s income primarily comes from:  
• Return from domestic sources which includes 
interest on Loans and Advances, interest on Liquidity 
Adjustment Facility (LAF) operations etc.  
• Other income from domestic sources including 
Profit/Loss on sale and redemption of Rupee 
securities, Commission among others.  
• Return from foreign sources which includes interests 
from foreign currency deposits, interest on 
Repo/Reverse Repo transactions etc. 
• Other income from foreign sources including 
Profit/Loss on sale and redemption of foreign 
securities, Gain/Loss from forex transactions among 
others.  
RBI’s expenditure primarily happens on:  
• Provisioning of risks in RBI’s reserves: Contingency 
Fund (CF) and Asset Development Fund (ADF).  
o Contingency Fund (CF): It is the second biggest fund 
designed to meet contingencies from exchange rate 
operations and monetary policy decisions. 
ü It is funded in large part from the RBI’s profits.  
o Asset Development Fund (ADF): It represents 
provisions made towards investments in 
subsidiaries and associated institutions and to meet 
internal capital expenditure. 
• Printing of notes.  
• Agency charges which includes commission to banks, 
primary dealers etc.  
• Employee cost.  
Overall 
• RBI’s total expenditure is only about 1/7th of its total net interest income, thereby generating surplus.  
How does RBI transfer surplus to the 
government?  
• As RBI is not required to pay income 
tax, it transfers the surplus amount to 
the government. 
• RBI transfers the surplus in accordance 
with Section 47 (Allocation of surplus 
profits) of the Reserve Bank of India 
Act, 1934. 
• In the past, various committees have 
been formed to decide the ideal 
amount of surplus that should be 
transferred to the Central Government. 
These committees were headed by V 
Subrahmanyam in 1997, Usha Thorat in 2004 and Y H Malegam in 2013 and Bimal Jalan in 2018. 
• Earlier, RBI used to keep a major chunk of this surplus for its CF and ADF. However, after the Malegam 
Committee (2013) recommendations its transfer of surplus to government increased. 
	
27	 																																																																											
• Later, the Bimal Jalan committee provided a revised Economic Capital Framework or ECF. ECF provides a 
methodology for determining the appropriate level of risk provisions and profit distribution to be made 
under Section 47 of the RBI Act, 1934.  
o As per this revised ECF the amount of surplus that the RBI must transfer to the Centre is determined 
based on two factors 
ü Realized equity (essentially existing amount in CF): The CF be maintained within a range of 6.5% to 
5.5% of the RBI’s balance sheet and the excess amount is to be transferred to the government. 
ü Economic capital (essentially CGRA): It should be kept in the range of 20-24.5% of the balance sheet 
and rest should be transferred to government. 
Why RBI surplus has gone up sharply this year? 
• Lower expenditure due to reduction in Provisioning amount is one of the major reasons for higher surplus. 
o This time round, by announcing that it had decided to maintain CF at 5.5%, RBI has chosen to maintain the 
lowest required buffer while passing on to the government the maximum possible surplus.  
• Rise in the RBI's surplus could also be linked to higher income from its Open Market Operations as well as the 
sizeable rise in forex reserves. 
• Another reason could be the targeted long term repo operations (TLTROs). 
o TLTROs refer to targeted long-term repo operations used to infuse cash in the banking system for on-lending to 
specific sectors. 
Arguments in favor of transferring surplus to government 
• Maintaining fiscal deficit targets: The excess surplus transfer offers a great opportunity to the government 
to contain and even lower the fiscal deficit. 
• Keeping interest rates low: 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. 
• Providing stimulus to economy: The move 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. 
• Meeting revenue targets: It will help the government counter the shortfall in revenue and tax collection. 
• Global Benchmark: RBI reserves stands around 26% of RBI’s balance sheet. The global median is 16%. 
Argument against transferring surplus to government 
• Need for adequate contingency fund with the RBI: To tackle the otential threats from financial shocks, to 
ensure financial stability and provide confidence to the markets.  
o Contrary to this, the current massive payout has raised concerns that the government may resort to the 
RBI to meet its urgent spending needs, thus effectively turning the central bank into a banker for the 
government. 
• Maintaining autonomy: Low capital will force RBI to turn to government in time of need. This will give 
government influence over the central bank. 
• Impact on credibility of RBI: It can cause investors to lose confidence in the RBI’s ability to preserve the 
value of the rupee. 
Conclusion 
The COVID-19 crisis has posed a great challenge to debt sustainability in emerging and advanced 
economies. Also, widening fiscal deficit, challenges in meeting disinvestment targets, possible shortfall in GST 
collection etc. will keep fiscal resources of the government under pressure.  
The surplus transfer from the RBI will provide some cushion. However, the manner in which the funds are used 
will be critical. The share of capital expenditure as a percent of GDP has been falling in recent years. This time 
around, the Centre will need to put the RBI’s surplus funds to productive use that can have a sustainable 
multiplier impact on overall growth in the economy. 
3.3.	UNEMPLOYMENT	IN	INDIA	
Why in news? 
India’s unemployment rate rose to 7.11% in the year 2020 (highest in three decades), according to the 
International Labour Organization (ILO).