Fiscal boost or deficit plug, Reserve Bank of India is yet to decide

Dubai: The Reserve Bank of India’s (RBI) record Rs1.76 trillion (Dh89.54 billion; $24.4 billion) transfer to the government will give the finance ministry the options to use the money to cover the revenue shortfall or spend on fiscal boost to the slowing economy, according to economists.

The RBI’s board approved the transfer yesterday, which includes a dividend of Rs1.23 trillion and Rs526.4 billion from its surplus capital, according to a statement from the central bank. The dividend payment includes 280 billion rupees already transferred to the government in February.

Clearly the transfer gives the government the much needed fiscal space to manage revenue shortfalls and or boost spending.

Tax revenue shortfall

Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc., estimate India has a tax revenue shortfall of Rs1 trillion, or 0.5 per cent of GDP.

“Gains from excess RBI dividends are likely to be utilised to bridge the revenue shortfall rather than engage in stimulus measures,” they said in a note.

Fiscal targets

The RBI transfer is widely seen as a windfall for the government. However, economists differ on how the government is likely to use the money.

“The RBI’s transfer of Rs1.76 trillion to the government should offset any revenue shortfall from lower tax buoyancy amid slower growth this year, allowing more room to boost spending. It will also make it easier for the government to meet its budget deficit target of 3.3 per cent of GDP for fiscal 2020,” said Abhishek Gupta, India economist of Bloomberg Economics.

Samiran Chakraborty and Baqar M Zaidi, analysts at Citigroup Inc. said the government had two options: it can immediately spend part of the amount to stimulate the economy or it can wait for some clarity to emerge on the potential revenue shortfall before spending the money.

Since the government has shown “stellar resolve” in maintaining” fiscal targets, “our bias is to think that the government will follow the latter approach,” they wrote in a note.

The windfall will probably be pumped into banks, which should help reduce lending rates, Bank of America Merrill Lynch economists Indranil Sen Gupta and Aastha Gudwani said in a note. That would be a “game changer” for the economy, they said.

Short of a windfall

Analysts say the much hyped transfer fall short of a windfall to the government as much of the total amount, Rs1.23 trillion is dividend payout and only Rs526.4 billion is transferred from its surplus capital.

“This is far below the hopeful bounties being talked about. Not just that, future payouts are now formula driven and subject to some constraints. However, we believe, this disappointment is blunted owing to a much higher than expected normal dividend transfer for the current year which, if used judiciously, can be invaluable in making the budget math sound more credible,” said Suyash Choudhary, Head — Fixed Income, IDFC Asset Management Company.

Effects of fund transfer

■ Dividend component is much larger than transfers from reserves
■ Net additional amounts involved here at just under 0.3 per cent of GDP
■ India has a tax revenue shortfall of Rs1 trillion, or 0.5 per cent of GDP
■ Money most likely to be used for covering revenue deficit
■ Growth impact will depend on how much the government is willing to spend
■ Impact on stocks and currency is subject to fiscal boost