RBI surplus provides fiscal boost to Centre in a tough year

Reserve bank of india_RBI

Reserve bank of india_RBI

The Reserve Bank of India’s (RBI) announcement on May 21 that it will transfer Rs 99,122 crore as surplus to the government will come as a welcome boost to the Centre’s finances.

While the surplus paid by the central bank is for July 2020-March 2021 (as it shifts from a July-June to April-March financial year), it will be accrued this month, and will thus reflect in the Centre’s 2021-22 financial year (April 2021-March 2022).

As per the 2021-22 budget, the estimates for revenue from dividends by the RBI and state-owned banks and financial institutions stand at Rs 53,510.6 crore. Just the surplus paid by the RBI surpasses that target by around Rs 45,611 crore.

Provided all other budget assumptions regarding revenue and expenditure remain the same, just that additional Rs 45,611 crore in revenue will reduce the fiscal deficit as a percentage of nominal gross domestic product (GDP) to 6.56 per cent for 2021-22, compared to a budgeted target of 6.8 per cent, our calculations show.

Fiscal deficit is the difference between the sovereign’s expenditure and revenue when the former is higher.

In absolute terms, fiscal deficit for the current financial year is estimated to be Rs 15.07 lakh crore. The additional surplus from RBI would take it down to Rs 14.63 lakh crore, if other budget estimates remain unchanged.

And this extra money the Centre could do with. The second wave of COVID-19 infections, and the resultant localised lockdowns mean that tax revenue collections could be hit over the coming months.

Additionally, doubts are being raised whether the government will be able to meet the ambitious Rs 1.75 lakh crore divestment target for the year, as a number of privatisation plans like those of Air India and Bharat Petroleum, which were initially planned to be completed in the first half of the current year, have now been pushed to the second half.

Centre’s spending could increase

It is also expected that the Centre’s expenditure commitments will increase as it seeks to pull the economy out of the impact of the second COVID wave. The budgeted expenditure for the year is Rs 34.8 lakh crore.

“On the revenue front, this is definitely a relief for the Centre, whose finances would soon come under pressure amidst fears of a delayed execution of the ambitious divestment target, higher possible doles and payouts than budgeted on food, fertiliser subsidy and NREGA, and possible fading of the positive upside surprises of fiscal tax buffers on account of modestly budgeted indirect taxes,” said Madhavi Arora, Lead Economist, Emkay Global.

Arora said that the dividend paid by RBI is for a shorter transition period of nine months, and that had they paid for a full 12 months, it could have been as high as Rs 1.3 lakh crore.

“A larger-than-expected dividend from the RBI provides the fiscally stretched government with room to provide more relief measures to alleviate the impact of the second COVID-19 wave,” said Rahul Bajoria, Chief Economist with Barclays.

“The amount of surplus to be transferred by the RBI to the government of India is considerably higher than the budgeted level. This will offer a buffer to absorb the losses in indirect tax revenues that are anticipated in May-June 2021,” said Aditi Nayar, Chief Economist with Icra Ltd.

Nayar also said that apart from GST, direct tax collections as well as margins of corporates could be impacted due to the economic slowdown and globally high commodity prices.