The Reserve Bank of India (RBI) has announced an unprecedented dividend of Rs 2.1 lakh crore for the Central government for FY24, significantly exceeding market expectations of Rs 80,000 to Rs 100,000 crore.
This dividend is approximately 141% higher than the previous year's payout and will help better manage the fiscal deficit and give the government greater room to maneuver on the expenditure side.
The dividend or surplus transfer by the RBI to the Centre was Rs 87,416 crore for the fiscal 2022-23. The previous high was Rs 1.76 lakh crore in 2018-19.
Interim Budget For Fiscal Year 2024-25
In the interim budget for the current fiscal year, presented on February 1, the government had anticipated a dividend of INR 1.02 lakh crore from the RBI, public sector banks (PSBs), and other financial institutions. The record-high dividend comes despite the RBI increasing its contingency risk buffer (CRB) to 6.5% from the previous 6%, the highest within the recommended range of 5.5-6.5% (as suggested by the Bimal Jalan Committee).
This buffer is crucial for managing unforeseen risks related to the depreciation of securities, and monetary, or exchange rate policy risks. The substantial dividend possibly stems from higher income generated from the RBI's forex portfolio, driven by the US Federal Reserve's aggressive interest rate hikes in recent years.
The fact that the RBI could deliver such a high dividend while simultaneously strengthening its balance sheet by increasing the CRB is a positive indicator of its robust financial management.
That the RBI has been delivering on all fronts, despite geopolitical fractures and global economic volatility, with supply chain disruptions, is a hat-tip moment for it. The thing to ponder, though, is that the interim Union budget numbers were presented on February 1. As part of the budgetary planning process, the government would have received indicative budget assumptions from the RBI.
Surprisingly, such a low (dividend) number was assumed, and in just two months, the RBI’s profitability seemingly surged enough to offer this highest-ever dividend. The increased dividend is expected to positively impact the fiscal landscape. It will probably contribute to a lower fiscal deficit and reduced government borrowing.
Interim Budget's Aim
The interim budget aimed at reducing the fiscal deficit to 5.1% of the GDP in FY25 from 5.8% in FY24 a target initially deemed ambitious by some. However, with tax collections exceeding revised projections for FY24, the government is poised to improve upon these fiscal deficit projections.
Even if the government decides to allocate a portion of the dividend for expenditure or tax reduction, it's reasonable to assume that a significant portion will still aid fiscal consolidation. This could improve domestic liquidity and provide relief to the bond markets, traditionally dominated by government demand.
The higher dividend affords the government greater flexibility in the Union Budget FY25, which will be presented by the new Cabinet. It creates room for enhanced capital expenditures, potentially stimulating private investment and supporting economic growth. In all, this is the fiscal red carpet that the RBI has rolled for the incoming Cabinet.
Dr Srinath Sridharan is a policy researcher &corporate adviser.X: @ssmumbai
