The Modi administration’s overspending gets rewarded with an interim dividend from the central bank
- In a bid to meet its
fiscal deficittarget, the government has secured a much-needed lifeline from the RBI.
- The RBI will transfer ₹280 billion worth of its
surplusreserves in the form of an advanced dividendto the government.
- This is in addition to the ₹400 billion it has already transferred this fiscal year so far.
The RBI will transfer ₹280 billion worth of its surplus reserves in the form of an advanced dividend to the government for the half year ended December 2018, in addition to the ₹400 billion it has already transferred this fiscal year so far.
Speaking to ET Now, Ananth Narayan, a professor of SPJIMR, said that the government’s practice of taking an advanced dividend from the RBI was akin to a company taking money from a subsidiary in advance of the subsidiary having earned that amount. He also said that the government’s projections of RBI revenues for the year were highly optimistic.
The RBI’s financial year runs from July to June while the government follows a April to March system, making an advanced dividend payout a particular burden on the central bank, which has three more months before the year ends.
Of course, this was expected, especially in the wake of a extremely populist interim budget and a shortfall in tax revenues. One of the budget’s major initiatives, a cash handout to farmers, will commence on February 24th, and is expected to comprise an outlay of around ₹200 billion by March 31st.
A clash between the central government and the RBI over the size of such a transfer, among other issues, culminated in the resignation of former governor
The dividend transfer will help the Modi government try and deliver on its budget promises, which will boost its prospects for re-election in May. However, this might come at the cost of the central bank’s financial health.
‘The RBI has inadequate capital reserves to service such a transfer, according to the Centre for Advanced Financial Research and Learning, a Mumbai-based think tank. A study by the think tank showed that at 6.6%, the RBI’s capital-to-assets ratio, was more than 30 basis points lower than the average level seen in emerging markets, indicating under-capitalisation.
Besides, the RBI needs its surplus capital to shore up the rupee, lend to banks and provide adequate liquidity support to the economy, which is reeling from a slowdown in credit growth and aggregate demand following the crisis in the NBFC sector.
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