Govt wants RBI help again to fill budget gap, but even RBI money may not help cover revenue shortfall

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August 14, 2020 9:53 AM

India’s 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 is meeting Friday, and since August is typically the month the central bank makes its annual transfer to the government, expectations are running high.

India’s 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 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 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. This year, New Delhi has budgeted for a 600 billion-rupee transfer, but local media has speculated authorities are expecting more. Analysts and economists are forecasting anything between 400 billion to 1 trillion rupees.

“Our estimate is for 400-500 billion rupees, 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% 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

For more research, click here

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.

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