‘Contingency Fund (CF)’

  • Category
    Economy
  • Published
    2nd Sep, 2020

Context

The Reserve Bank of India (RBI), the government’s banker, has retained a whopping amount of Rs 73,615 crore within the RBI by transferring it to the Contingency Fund (CF) of the central bank, thus leading to a sharp fall in the transfer of surplus to the government in the current year.

About

  • The Contingency Fund of India is established under Article 267 of the Indian Constitution. It is in the nature of an imprest (money maintained for a specific purpose).
  • This is a specific provision meant for meeting unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks and any risk arising on account of the special responsibilities enjoined upon the Reserve Bank.
  • Simply put, the fund that is set up specifically to meet the challenges at the time of a crisis
  • This amount is retained within the RBI.
  • The Secretary to the Government of India, Ministry of Finance, Department of Economic Affairs holds the fund on behalf of the President.

Contingency Funds for States

  • Similarly, Article 267(2) of the Indian constitution authorises state legislatures to set up contingency funds for the states in order to meet emergency situations.
  • The fund will be kept under the disposal of the State Governor and any use of the fund can be done after gaining approval from the State legislature.
  • Any expenditure incurred from this fund requires a subsequent approval from the Parliament and the amount withdrawn is returned to the fund from the Consolidated Fund.

Consolidated Fund of India

  • This fund was constituted under Article 266 (1) of the Constitution of India.
  • All revenues received by the government by way of direct taxes and indirect taxes, money borrowed and receipts from loans given by the government flow into the Consolidated Fund of India.
  • All government expenditure is made from this fund, except exceptional items which are met from the Contingency Fund or the Public Account.
  • Importantly, no money can be withdrawn from this fund without the Parliament’s approval.

What’s the CGRA account?

  • The Currency and Gold Revaluation Account (CGRA) is maintained by the Reserve Bank to take care of currency risk, interest rate risk and movement in gold prices.
  • Unrealised gains or losses on valuation of foreign currency assets (FCA) and gold are not taken to the income account but instead accounted for in the CGRA.
  • Net balance in CGRA, therefore, varies with the size of the asset base, its valuation and movement in the exchange rate and price of gold.
  • CGRA provides a buffer against exchange rate/ gold price fluctuations.
  • It can come under pressure if there is an appreciation of the rupee vis-à-vis major currencies or a fall in the price of gold.
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