RBI dividend a third of last year’s; to transfer surplus of Rs 57,128 crore to govt

The Reserve Bank of India (RBI) on Friday said it would transfer a surplus of Rs 57,128 crore to the government for 2019-20 (July-June). For the Centre, the receipts will be budgeted for the fiscal year 2020-21, and are almost in sync with its own budget estimate of transfers from the central bank for the year, but the amount would now look insufficient given that Covid-19 crisis has hit its other revenues, including tax receipts, hard.

Thanks to the Bimal Jalan committee, which reviewed the RBI’s economic capital framework (ECF), the central bank transferred an all-time high amount of Rs 1.76 lakh crore to the government in 2018-19 (July-June).

Of this, Rs 1.48 lakh crore was budgeted for 2019-20 by the Centre. The amount transferred by the RBI in its last accounting year included the entire net disposable income of Rs 1.23 lakh crore for 2018-19 and an additional Rs 52,637 crore of ‘excess provisions’ identified as per the Jalan committee’s formula. The transfers from RBI last fiscal was therefore a steep 64% higher than Rs 90,000 crore the Centre had budgeted for, and helped it to rein in the fiscal deficit at 4.6% of the GDP, though this was still far higher than 3.3% initially budgeted.

While the Jalan committee said 6.5% to 5.5% of the balance sheet as the ‘realised equity’ (contingency risk buffer) to be kept, the RBI decided to maintain it at the lower end of 5.5% last year, a move which enabled it to write back excess risk provisions of Rs 52,637 crore. For 2019-20 too, the transfer amount has been decided keeping the buffer at 5.5%, implying that the RBI has been as generous as it could be.

In FY19, the RBI’s net disposal income stood at Rs 1.23 lakh crore, much higher than any of the recent years as a result of an unusually large amount of open market operations (OMOs) conducted by it during the year and absence of the need for fresh risk provisions. The additional interest income from OMOs was Rs 36,000 crore and a change in the formula for determining forex gains and losses yielded gains to the tune of Rs 21,000 crore. None of these factors were at play this year.

The government had budgeted for lower dividend from the RBI and state-run lenders 2020-21, as it has decided to rely heavily on disinvestment. It has provisioned Rs 89,648 crore in dividends from the “RBI, public-sector banks and financial institutions” for 2020-21. Of this, the transfer expected from the central bank is believed to be close to Rs 60,000 crore.

The Centre’s fiscal deficit stood at 83% of the FY21 target in Q1 owing to a big revenue slippage and the fact that expenditure growth was more or less maintained at the budgeted level of 13%. Analysts see the deficit, pegged at Rs 8 lakh crore for FY21, nearly doubling.

In a recent report, Deutsche Bank said that overall revenues of the Centre are likely to be lower by 2% of gross domestic product (GDP) relative to FY21 budget estimates. “We don’t see any meaningful upside potential arising from RBI’s dividend to Government of India relative to budget estimates (Rs 89,600 crore), as any potential one-off transfer related to economic capital framework (based on the change in accounting principles for calculation of reserves, adopted from last year), is likely to be offset by the cost which the central bank is bearing in terms of paying interest rate (at the reverse repo rate) on excess liquidity (more than Rs 7 lakh crore) to banks at the LAF (liquidity adjustment facility) window.” Deutsche Bank expects the total fiscal deficit of the government to rise to 8% of GDP in FY21 from 4.6% in FY20.