New Delhi: The Reserve Bank of India today approved to give Rs 57,128 crore to the government as surplus for the accounting year 2019-20. In the 584th meeting of the Central Board of the Reserve Bank of India, the decision of surplus transfer was taken, after maintaining the Contingency Risk Buffer at 5.5 per cent, said a statement by RBI.
However, the surplus transfer in the last fiscal fell steeply in comparison to the previous year. For the accounting year 2018-19, the central bank had transferred a surplus of Rs 1.76 lakh crore to the government. Low earnings from bond holdings and unavailability of one time-gains unlike the previous year are likely to be the major reason behind low surplus transfer in the last fiscal.
Last year the RBI’s board approved a record payment of 1.76 trillion rupees ($23.5 billion) to the government, which included 1.23 trillion rupees as dividend and 526.4 billion rupees from its surplus capital.
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% 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% 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 monetization in India cite risks to the nation’s credit rating and inflation, which is already above the RBI’s 2%-6% target range.
What Bloomberg’s Economists Say
To make up for that shortfall the government and the RBI need to go in for monetization of fiscal deficit. A transfer of few hundred billion rupees of additional reserves from the central bank is unlikely to move the needle much for government finances, in our view.
— Abhishek Gupta, India economist
The RBI pays dividends to the government every year, based on the profits from its investments, both 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 trillion rupees 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 700 billion rupees to maintain capital buffers.
Source: RBI press release and Bloomberg inputs. Heading is of Ziraat Times