Last week’s decision of the Reserve Bank of India to transfer Rs 2.1 lakh crore as a surplus to the central government for the financial year 2023-24, which is around 0.6% of the country’s gross domestic product (GDP), is unlikely to be sustained, global rating agency Fitch said on Monday.
Fitch pointed out that this dividend payout by RBI is double of what was projected in the Union Budget, which was pegged at 0.3% GDP or Rs 1.02 lakh crore.
Transfers from RBI to the government can be significant at the margin for fiscal performance, but depend on various factors, including the size and performance of assets held on the central bank’s balance sheet and India’s exchange rate. Transfers may also be influenced by the RBI’s views on what level of buffer is appropriate to maintain on its own balance sheet.
“The potential volatility of transfers means there is significant uncertainty about their medium-term path, and we do not anticipate that dividends as a share of GDP will be sustained at such a high level," the rating agency said.
According to the rating agency, an important driver of higher RBI profits during the financial year ended March 2024 appears to be higher interest revenue on foreign assets. The RBI has not released any detailed breakdown of its earnings during the fiscal under review.
How will the government use this windfall receipt from the RBI? Fitch listed two alternatives. First, the government could opt to keep the current deficit target for FY25, and the windfall could allow the authorities to further boost spending on infrastructure, or to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment. Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1% of GDP.
“The government’s choice could give greater clarity around its medium-term fiscal priorities,” Fitch said.
In the interim budget presented in February, Union Finance Minister Nirmala Sitharaman proposed to lower the fiscal deficit from an estimated 5.8% of GDP in 2023-24 to 5.1% in 2024-25 and further down to 4.5% in 2025-26. The full budget for 2024-25 is likely to be presented in July following the formation of the new government.
“Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium-term,” Fitch Ratings said.