RBI’s payout seen as not enough to prop up government finances

Finance Minister Nirmala Sitharaman can expect another payout from the central bank in coming weeks, but it’s unlikely to plug a huge government revenue hole created by the pandemic.

The Reserve Bank of India’s board, led by Governor Shaktikanta Das, is meeting on Friday, and since August is typically the month the central bank makes its annual transfer to the government, expectations are running high that the RBI will disclose its dividend payout.

Last year, the RBI’s board approved a record payment of ₹1.76-lakh crore to the government, which included ₹1.23-lakh crore as dividend and ₹52,640 crore from its surplus capital. This year, New Delhi has budgeted for a ₹60,000-crore transfer, but the media has speculated authorities are expecting more. Analysts and economists are forecasting anything between ₹40,000 crore to ₹1-lakh crore.

“Our estimate is for ₹40,000-50,000 crore, so it may fall short of the budgeted levels and thereby adding to fiscal pressures,” said Kanika Pasricha, an economist at Standard Chartered Plc in Mumbai.

Revenue is falling well short of projections as India’s economy heads for its first full-year contraction in more than four decades. At the same time, the government is being forced to spend more to cushion the blow from the pandemic, straining the budget deficit. The government can help bridge the funding gap by drawing more cash out of the central bank, sell state assets and push up borrowing, which is already at a record high.

Standard Chartered predicts the government’s fiscal deficit will surge to 7.4 per cent of gross domestic product in the current fiscal year, more than double the government’s original target.

With limited alternative revenue sources and the budget gap in the first three months of the fiscal year already standing at 83 per cent of the full-year target, calls are growing for the RBI to directly finance the fiscal deficit. Central banks in Indonesia and the Philippines have already adopted this approach, but those opposed to debt monetisation in India cite risks to the nation’s credit rating and inflation, which is already above the RBI’s 2 per cent-6 per cent target range.

What Bloomberg’s economists say

To make up for that shortfall the government and the RBI need to go in for monetisation of fiscal deficit. A transfer of a few hundred billion rupees of additional reserves from the central bank is unlikely to move the needle much for government finances, in our view, said Abhishek Gupta, India economist.

The RBI pays dividends to the government every year, based on the profits from its investments, both at home and abroad, and printing of notes and coins. In recent years, the government has been putting pressure on the central bank to increase its payouts. An expert committee last year recommended the central bank could part with some of its surplus capital.

“We expect dividend of ₹1.05-lakh crore based on higher income from domestic assets,” said A Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai. He expects the central bank to set aside more than ₹70,000 crore to maintain capital buffers.