The Indian government is set to receive a windfall gain from the central bank amid the economy struggling to accelerate growth. Analysts, however, argue that there is limited scope to spending that money.
The Reserve Bank of India said Monday the central bank will transfer 1.76 trillion Indian rupees (about $24.6 billion) as dividend to New Delhi for the year that ended on June 30, 2019. That was higher than what the market had been expecting.
The RBI follows a 12-month period that runs from July to June and pays an annual dividend to the government based on its profits. Dividend is a sum of money paid annually by a company or a bank to its shareholders out of its profits.
Last year, the RBI board formed a committee to look into how much the central bank should hold in its reserves amid a push from the government to access the surplus for stimulus packages.
This week's move from the central bank could provide Prime Minister Narendra Modi's government with some breathing room. However, the move by the government to dip into central bank reserves in order to fund fiscal deficits has received wide criticisms.
On one hand, India needs policies to help prop up growth, which has slowed considerably in recent quarters. On the other hand, it needs to maintain the 3.3% fiscal deficit target set for the current year — or risk denting investor confidence in India.
The government had budgeted for around 900 billion rupees as dividend from the RBI for the year ending March 31, 2020, Citi analysts wrote in a note on Monday.
Taking into account the interim dividend that the central bank has already paid, the government is set to make additional gains of about 576 billion rupees, or approximately 0.3% of the GDP, according to calculations done by the Citi analysts. They explained that Monday's announcement is a one-time "excess capital" and removes the possibility of such large transfers over the next several years.
In early July, India's former Finance Secretary Subhash Chandra Garg said that the government expects 900 billion rupees as dividend from the RBI in the current fiscal year, according to local media reports.
What the RBI payout may be used for
Analysts said this week the government will likely opt to use the dividend to plug a predicted shortfall in its budgeted tax revenues, instead of funding additional spending plans or scaling back on full-year borrowings.
The RBI "has been asked to rescue the Indian government by helping it to meet the financial obligations tied to the recently announced policy measures (along with its budgetary ambitions) aimed at jumpstarting the country's stalling economy," Kunal Kundu, India economist at Societe Generale, wrote in a Tuesday note.
Last week, India outlined a raft of measures to boost sentiment in the economy — many were expecting the government to announce new spending plans instead. Kundu said last week's policy measures will not likely provide much of a boost to the stalling economy, and its impact will be "marginal at best."
"While there are reports that the government may use this surplus to declare additional fiscal stimulus in reaction to sagging growth, we believe the space for this is limited," Sonal Varma and Aurodeep Nandi from Nomura wrote in a Monday note.
"The current fiscal deficit target of 3.3% of GDP is contingent on relatively aggressive assumptions on tax collections and higher nominal GDP growth than what may actually be realised," they said, adding that in a weak growth environment, there could be a shortfall of about 1 trillion rupees — or 0.5% of GDP — in tax revenues.
"Thus gains from excess RBI dividends are likely to be utilized to bridge the revenue shortfall rather than engage in stimulus measures," Nomura said in the note.
The RBI's news release did not specify the exact timing of the dividend transfer to the government.
If it is an immediate cash transfer, where New Delhi uses part of the money to settle unpaid claims and goods and services tax refunds, then the liquidity in the system will improve further, Citi analysts Samiran Chakraborty and Baqar M Zaidi said in their note.
As a result, they said, it could reduce the central bank's need to carry out open market operations to improve liquidity in the latter half of the fiscal year. Open market operations refer to the buying and selling of government securities in the market by central banks and are considered to be one of the tools to achieve monetary policy objectives.
— Correction: This article has been updated to reflect that the Indian government had budgeted for around 900 billion rupees as dividend from the RBI for the year ending March 31, 2020.