The Reserve Bank of India (RBI) on Thursday announced that it will transfer Rs 30,659 crore as surplus to the government for the year ended June 2017, less than half the amount transferred last year.

While the move could upset the Finance Ministry’s Budget arithmetic, a lower surplus also dents the broad premise that scrapping of currency notes that failed to return to the banking system post demonetisation would extinguish the RBI’s liabilities to an equivalent measure and, thus, open the possibility of transfer of these gains to the Centre in the form of higher dividends.

Technically, the transfer of profits is provided in Section 47 of the RBI Act, which states that after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation fund and for all matters for which provisions are to be made by or under the Act or that are usually provided by bankers, the balance of the profits of the bank is required to be paid to the Central government.

The RBI’s profits essentially represents the difference of income over expenditure. The key source of income for the Central bank is interest arising from its foreign assets and domestic assets.

For the year 2015-16, the RBI board had approved the transfer of surplus amounting to Rs 65,876 crore to the government. In the previous year, the Central bank had paid Rs 65,896 crore to the government, which came as a boon to the government in covering the deficit. The surplus transferred to the government was Rs 52,679 crore in 2013-14. The RBI did not give reasons of the sharp fall in the surplus income for the year ended June 2017.

The government had, in December last year, issued an ordinance for scrapped currency notes, paving the way for potential surplus transfer from the RBI on account of demonetisation.

As per the Specified Bank Notes (Cessation of Liabilities) Act, 2017, the scrapped currency notes of Rs 500 and Rs 1,000 (as announced on November 8 last year) “shall cease to be liabilities of the RBI under section 34 of the Reserve Bank of India Act, 1934 and shall cease to have the guarantee of the Central Government under sub-section (1) of section 26 of the said Act”.

A month earlier, in November, the then Attorney General for India Mukul Rohatgi, while replying in the Supreme Court on the demonetisation issue, had said that out of the total estimated money in circulation of Rs 15-16 lakh crore, the government expected people to deposit Rs 10-11 lakh crore in banks. “The rest, Rs 4-5 lakh crore, were being used in northeast and Jammu and Kashmir to fuel trouble in India. That will be neutralised,” he had said.

Incidentally, the YH Malegam committee had suggested in 2014 that the Central bank can transfer its entire surplus to the government, without allocating anything to its various reserve funds, for three years because it had adequate reserve funds.

The lower amount will be a concern since the government’s non-tax receipts will be affected. “In the Budget it was assumed that around Rs 75,000 crore would come from the RBI, public sector banks and financial institutions compared with a little over Rs 76,000 cr in FY17,” rating firm Care Ratings said.

“As public sector banks are unlikely to do better than last year and the RBI will be transferring a smaller amount, this will impact the fiscal deficit numbers. If other conditions remain unchanged, the fiscal deficit can increase from 3.2 per cent to 3.4 per cent this year,” it said.

The RBI’s main source of income is interest earned on bond holdings through open market operations or purchase and sale of government securities. Following the recommendations of the Malegam committee, the RBI stopped transfers to internal reserves since its accounting year 2013-14 which is now a part of expenditure.According to the Malegam panel report, the RBI transfers the balance of its profits to the Central Government as per Section 47 of the RBI Act, 1934, after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation fund and for all matters for which provision is to be made by or under the Act or which are usually provided by bankers.

For the year 2015-16, the RBI board had approved the transfer of surplus amounting to Rs 65,876 crore to the government. In the previous year, the Central bank had paid Rs 65,896 crore to the government, which came as a boon to the government in covering the deficit.