People stand in line at the Reserve Bank of India headquarters in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

Budget 2019: Modi Turns To RBI For Fixing Fiscal Math After Populist Budget

The Narendra Modi government will depend on large dividend transfers by the Reserve Bank of India to balance its budget deficit after announcing a spate of populist measures ahead of the upcoming general election.

The government estimates getting Rs 82,911 crore through dividend from banks, financial institutions and the RBI in 2019-20, according to the budget document. Even in the ongoing fiscal, it estimates getting Rs 74,140 crore, much higher than the budget estimate of Rs 54,817 crore.

Economic Affairs Secretary Subash Chandra Garg said after the finance minister presented the budget that the government expects Rs 28,000 crore more from the central bank as interim dividend. The RBI had paid Rs 40,000 dividend in August last year.

The additional demand comes as the revenue from the goods and services tax, for most part of the year, has lagged the Rs 1 lakh crore monthly target. Moreover, the government’s planned stake sales in state-run firms are still short of the target even though Finance Minister Piyush Goyal remains confident of exceeding the Rs 80,000-crore estimate. That leaves the government counting on the RBI to make up for the shortfall as it missed the fiscal deficit target for the second straight year.

The government typically uses dividends from state-run firms, financial institutions and the RBI to fund its additional expenditure. It has pegged such dividends at Rs 1.36 lakh crore in 2019-20. That’s a 14 percent rise from an already elevated dividend collection of Rs 1.19 lakh crore in 2018-19.

Balance sheets of most state-run banks remain stretched as they reported losses or marginal profits. Which means they may not be able to dole out large payouts even next year unless their financials improve significantly. That suggests the bulk of the expected Rs 82,911 crore in 2019-20 will come from the RBI.

The RBI keeps a portion of its profit in a contingency fund and transfers most of it to the government every year, which is then counted as fiscal revenue. Typically, the RBI makes those dividend payments after it closes its books of accounts in June. But it paid an interim dividend of Rs 10,000 crore in January last year.

The government is also said to have sought surplus reserves from the central bank, one of the flashpoints that brought its differences with the central bank out in the open last year before Urjit Patel quit as the central bank governor citing personal reasons. That had led to debate about the central bank’s independence, and a panel was appointed to look into the matter.

Also read: Budget 2019: Is The 3.4% Fiscal Deficit Target For FY20 Credible?