The North Block of Central Secretariat building which houses the Ministry of Finance in New Delhi, India (Photographer: Prashanth Vishwanathan/Bloomberg News)

RBI Interim Dividend, Lower Spend By Railways Help Government Better FY18 Fiscal Goal

A rare interim dividend by the Reserve Bank of India, lower than budgeted capital spending and strong growth in direct tax collections has helped the government meet its revised fiscal deficit target in the financial year 2017-18.

In an interview to BloombergQuint, Economic Affairs Secretary Subash Garg said that the fiscal deficit for the year is likely to settle at 3.4 percent of GDP compared to the revised target of 3.5 percent announced in Union Budget 2018-19. The government had originally targeted a deficit of 3.2 percent of GDP but had to revise the target due to volatility in tax revenue collections following the implementation of the Goods and Services Tax.

The final data for the government’s finances for the year ended March 2018 is yet to be released by the Controller General of Accounts.

“Taxes did very well, direct taxes more or less were 100 percent, there was an interim dividend from RBI, there was some expenditure shortfall at the end. The net result of all this was that we could do about 98 percent of the budgeted amount and finally the fiscal deficit was 3.4 percent,” said Garg.

Garg confirmed that the RBI had transferred Rs 10,000 crore in the form of an interim dividend for the central bank’s ongoing financial year. The RBI typically transfers the dividend at the end of its financial year which closes in July. This time, it has transferred an interim amount at the request of the government. Garg also said that some savings had come from the Railways, which could meet some of its expenditure from other sources.

Bank Capital Requirement

When asked whether the government would need to commit more capital for public sector banks following the RBI’s decision to tighten its stressed asset rules, Garg said that capital requirements would be determined by a number of factors. This includes the extent of recovery from large bad loan accounts which are being resolved under the Insolvency and Bankruptcy Code.

Also read: RBI Steps Up Defence Of Its New Stressed Asset Framework

“We still have a part of the recapitalisation package to go through. We used Rs 80,000 crore out of 1.35 lakh crore, so the remaining is still to be used,” Garg said, adding that the government is also keeping an eye on the progress of IBC cases.

Let’s see how the IBC process goes. There are some views now that the haircuts might be less than what was originally expected. There is also some tweaking of the norms on how much you provide for provisioning.
Subhash Garg, Economic Affairs Secretary

Besides, banks are selling non-core assets to generate funds, Garg said while declining to say whether the government believes more capital would be needed. He added that the government remains committed to reforms in the banking sector but declined to specify the nature of those reforms.

“…how this would be achieved is for the government and banks to discuss,” Garg said.

Commenting on concerns over a potential conflict of interest at Chanda Kochhar-led ICICI Bank over sanctioning of loans to debt-laden Videocon Industries Ltd., Garg said investigative agencies are looking into the matter. “We should treat it as an isolated case, it’s not systemic at all,” he added.

Private banks are well regulated…globally lot of fund managers, very credible investors invest in them.  I don’t think there is anything to be alarmed about private sector banking.
Subhash Garg, Economic Affairs Secretary

Government Bolsters Currency Chest

After a cash crunch hit some states due to sudden surge in demand, the government is stepping up its reserves to tackle any potential surge due to Diwali or elections.

“We have about Rs 2 lakh crore now, and we will make it good multiple of that in next couple of months, so that we can meet any demand if they were to arise once again around Diwali or next round of elections, so currency would not be in deficit,” Garg said.

Watch the full interview here.