A big handout from the RBI could help the Indian government meet its fiscal deficit target

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  • The Reserve Bank of India is transferring ₹500 billion to the central government’s coffers for the year ended June 30th, 2018.
  • This marks a 63% increase over the amount it transferred to the government last year.
  • With oil prices rising, the rupee depreciating, a shortfall in taxes and some divestments not going as planned, the government’s finances have been strained.
On August 8th, the Reserve Bank of India (RBI) announced that it was transferring ₹500 billion to the central government’s coffers, in addition to the₹100 billion it paid in March this year. The amount marks a 63% increase over the ₹307 billion dividend the central bank paid the Indian government last year. The RBI had to trim the dividend in 2017 due to the high costs it faced in printing new notes in the wake of demonetisation.

The handout will go a long way towards helping the government meet its fiscal deficit target of 3.3% of the GDP. With oil prices rising, the rupee depreciating, a shortfall in taxes, some divestments not going as planned and the bad loan crisis getting worse, the government’s finances have been strained.

In November last year, it had asked the RBI for a ₹130 billion lifeline to supplement its bank recapitalisation plans, which was subsequently rejected by the central bank because it needed to allocate the amount to its reserves. In its Union Budget for 2017-18, the finance ministry had earmarked a contribution of ₹580 billion from the RBI to meet its spending obligations.

Transfer of discretionary amount

The RBI mainly earns its revenue through the interest on bond-holdings and the sale of government securities. As stipulated in Reserve Bank of India Act, it is required to transfer its profits to the government every year after replenishing its fund reserves and accounting for bad debts. However, the amount that it is supposed to transfer isn’t specified.

The deployment of its profits towards other channels of government spending, such as the infusion into state-run banks, might not be the most efficient allocation of assets. However, the government will need to stick to its plan to pump ₹180 billion into the country’s public-sector banks by 2019.

Separately, the RBI is said to be mulling a government proposal wherein it will have to pay a fixed portion of its annual profit to the government every year. The policy proposal, which is expected to be discussed in the Parliament’s winter session, will help avoid any confusion or conflict related to the amount that the RBI transfers to the government every year.
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