Reserve Bank of India governor Shaktikanta Das says gross domestic product in the first half of the year is estimated to contract. Photo: AFP/Punit Paranjpe

The central bank of India will be transferring 571 billion rupees (US$ 7.63 billion) to the government as dividend for the year 2019-20 amid the economic slowdown caused by the the pandemic.

As the manager of government finances, the central bank pays the government a dividend each year to help it meet its financial targets.

The government had budgeted for a 600 billion rupees ($8 billion) dividend to bridge its fiscal deficit, which hit a record 6.62 trillion rupees ($ 88.41 billion) in the April-June period as the virus lockdown affected the government’s revenue collection. A fiscal deficit – an indication of the total borrowings required by a government – occurs when revenue collections fall short of expenditure.

India’s annual gross domestic product is projected to contract at least 5%. This would be the country’s worst economic performance since 1979.

The central bank’s financial year currently runs from July to June, but from next year the financial year will be aligned with the government and end in March.

In financial year 2018-19, the central bank transferred about 1.23 trillion rupees of its surplus to the central government and 526 billion rupees of excess provisions, as recommended by the Bimal Jalan committee.

This surplus transfer was a bone of contention between the central bank and the government during the tenure of previous governor Urjit Patel. He and his deputy Viral Acharya stridently opposed such a large scale transfer of funds to the government and both resigned before completing their terms.

In a recent interview with the Indian Express daily, Acharya said the practice of dividend payout to the government began a few years ago as a means of resolving a short-term problem, but it has now become a perennial problem. He termed the demand as “coercive monetization of government’s expenditures” and said the fiscal situation is stretched and they are constantly turning to the central bank to solve their problems.

Acharya said the transfers became large during former governor Raghuram Rajan’s term. He pointed out that former governors and deputy governors have generally not been in favor of transferring 100% of the RBI’s profits, as was done in some years.

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