The Reserve Bank of India headquarters in Mumbai. Photo: AFP
The Reserve Bank of India headquarters in Mumbai. Photo: AFP

The Indian government may seek an interim dividend from the central bank at the end of the financial year to help meet its fiscal deficit target for 2019-20.

The government aims to maintain its earlier target of a deficit of 3.3% of gross domestic product (GDP) and may seek 300 billion rupees (US$4.25 billion) as an interim dividend from the Reserve Bank of India, the Press Trust of India reported.

After GDP growth slipped to a six-year low of 5% for the first quarter of the current fiscal year, the government announced a slew of tax cuts to try to stimulate growth. In addition, the government’s finances had also come under pressure due to shortfalls in revenue collection.

An assessment about the interim dividend will be made in early January, an official told the news agency. Apart from the RBI dividend, the government may also look at other means to bridge any shortfalls, including mop-ups from disinvestment of state-owned enterprises and a higher utilization of the National Small Saving Fund, a repository of small savings collected from the public and administered by the Finance Ministry.

In the past, the government had sought interim dividends from the Reserve Bank to balance its account. In the last fiscal year, the central bank paid 280 billion rupees ($3.97 billion) as an interim dividend. During 2017-18, the government received 100 billion rupees ($1.42 billion) in interim dividends from the central bank.

Also Read: India’s RBI to transfer US$24 billion to govt

Last month, the Reserve Bank’s central board led by Governor Shaktikanta Das permitted the transfer of surplus funds to the government. This issue has been a contentious one and previous central bank governors Raghuram Rajan and D Subbarao opposed it.

Rajan had felt transferring central bank reserves would pull down Reserve Bank’s credit rating. Subbarao had termed it “raiding” the reserves of the central bank and added that it showed the “desperation” of a government.

Central banks across the world keep surplus funds to deal with things like currency fluctuations and other emergency situations. However, the government contended that the Reserve Bank’s surplus was much higher than what central banks of other countries were holding.

The predecessor of Das, Urjit Patel, tendered his resignation when the government was exerting pressure on the central bank to transfer surplus funds. Later Deputy Governor Viral Acharya also quit.

The government then appointed Shaktikanta Das, a career bureaucrat, as Reserve Bank Governor and a committee was formed last December to examine the central bank’s requirements on provisions, reserves and buffers. Known as the committee on External Capital Framework, it was headed by former central bank governor Bimal Jalan and it submitted its report in August.

The committee recommended the transfer of 1.76 trillion rupees ($24.9 billion), which is unprecedented in India’s history. It comprised 1.23 trillion rupees ($17.44 billion) of surplus for the year 2018-19 and the rest as excess provisions.

Of the 1.23 trillion rupees for the year 2018-19, the Reserve Bank had already transferred 280 billion rupees ($3.97 billion) to the government as an interim dividend in March 2019.

To lift the sagging economy and a 45-year high unemployment rate by reviving private investments, the government has taken a slew of measures, including a cut in corporate tax rate of almost 10 percentage points. It will have to forego revenue of 1.45 trillion rupees ($20.56 billion).

The government also withdrew the enhanced surcharge on long- and short-term capital gains for foreign portfolio investors as well as domestic portfolio investors with revenue implications of 14 billion rupees ($198 million). Even with regard to the Goods and Services Tax, it has approved a reduction in many items, which is expected to impact the exchequer.

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