How will RBI's Rs 99,000-crore dividend help the economy?

·Columnist
·5 min read

The Reserve Bank of India on May 21 announced that it will transfer a surplus of Rs 99,122 crore to the Government of India for the financial year 2020-21 (FY21). This dividend is for the nine-month period from July 1, 2020 to March 31, 2021.

The RBI follows an accounting year from July-June instead of Apr-Mar which GoI follows for the budget. RBI is now changing its year to Apr-Mar to align it with standard practice followed by corporates and banks: that is why the dividend is for 9 months and not 12 months.

While the dividend is reflected in the books of the RBI for FY21, since the Government of India follows a cash system of accounting, this will be shown as receipts in the budget for FY22.

The dividend announced is 73.5% higher than the Rs. 57,128 crore transferred for FY20. The Government of India had budgeted Rs 53,511 crore worth of earnings by way of total dividend from RBI. This is almost double the amount budgeted for FY22.

The higher transfer is clearly due to two factors as per CARE Ratings: higher interest income on holding of securities due to various open market operations, as well as sharp increase in forex reserves of around Rs 6.5 lakh crore.

As the manager of its finances, the RBI pays a dividend to the Government of India every year from its surplus or profit.

“After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds, the balance of the profits shall be paid to the central government,” Section 47 of the RBI Act says.

The increased payout could help the Government of India meet its budgetary obligations and in the revival of the economy.

1. Compensate for likely decline in revenues

At a time when the Government of India is grappling with the prospect of a fall in revenues (tax collections) due to the second wave and resultant lockdowns, this dividend comes as a breather.

The RBI, in its monthly bulletin, has said that the biggest toll of the second wave is in terms of a demand shock, this is likely to put pressure on indirect taxes targets.

Further, with commodity prices rising through the roof, the profit margins of companies are likely to be affected, which in turn could lead to decline in tax collections.

The Government of India’s ambitious Air India sale is also under the cloud now with Cairn suing the company in the United States to claim its arbitration award.

The increased dividend could negate up to 2.5% decline in revenue receipts estimated for FY22.

2) Meet fiscal deficit target

The Government of India is walking a tight fiscal rope having budgeted for a 6.8% fiscal deficit for FY22, down from 9.5% in FY21. Any slippages in revenues could jeopardize the efforts to achieve the target, as this number will be closely watched by the ratings agencies.

The dividend provides the Government of India with a buffer as it accounts for 3% of the fiscal deficit number.

3. Meet the expenditure commitments

The likely fall in revenues and risk of not meeting the disinvestment targets could have led to a decline in the Government of India expenditure, as this would have been one of the ways to remain committed to the fiscal path promised.

However, at a time when the economy is crippled due to the ravaging second wave of coronavirus cases and lockdowns to control the same, reducing expenditure is not an option at all.

This could have been politically suicidal especially when state elections are due next year where the Bharatiya Janata Party is in power in 6 of the 7 states and also hamper growth. There is also increasing pressure on the government for a cash transfer scheme to the poor like in the previous wave.

4. Reorient expenditure towards healthcare

The increased dividend is also likely to help the Government of India meet the unexpected increase in expenditure on healthcare precipitated by the second wave of the pandemic.

The amount can be used to set up hospital beds, construct oxygen plants, install CT scan equipment, and boost infrastructure.

Over the last decade or more, there has been a tussle between the Government of India and the RBI on the issue of dividends. GoI had sought higher payouts saying the RBI was maintaining capital buffers that were much higher than many other global benchmarks.

This was impacting its ability to spend money on infrastructure projects and social sector programmes.

The RBI, in consultation with the Government of India, constituted an Expert Committee to Review the Extant Economic Capital Framework under the Chairmanship of Dr. Bimal Jalan.

The committee recommended that the Contingent Risk Buffer (CRB) should be maintained within a range of 5.5%-6.5% of the RBI’s balance sheet, which was accepted in August 2019 and facilitated larger payouts.

The Rs 99,000-crore dividend is being paid after ensuring that the CRB is at 5.5% of RBI’s balance sheet.

To sum up, while the higher RBI dividend is good news for the Government of India, it would need to find out innovative ways of raising revenues, hope the disinvestment target is met in order to meet its budgetary estimates and revive the economy from the impact of the pandemic.

We may also have to encounter, and thus prepare for, a third COVID wave.

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