The Finance Ministry is learnt to have asked the Reserve Bank of India (RBI) about the quantum of interim dividend that can be transferred ahead of the presentation of the interim budget on February 1. Indications are that the Ministry is expecting the central bank to transfer an interim surplus of around Rs 20,000-25,000 crore which can be accounted for in the current fiscal year and could prove to be crucial in the Centre’s effort to contain the fiscal deficit at 3.3 per cent of Gross Domestic Product (GDP), sources said.
The finance ministry had, earlier, sought an amount of Rs 13,140 crore as additional dividend for the year 2016-17, which it believes is been pending with the Reserve Bank. The question by the Ministry to the central
bank comes just a month after the RBI set up a committee to work out the contours of the RBI’s economic capital framework, which is seen as crucial in addressing the contentious issue of the transfer of surpluses as dividend to the Centre.
The government and the central bank, which were at loggerheads over the issue of transferring higher surplus to the government during the tenure of former RBI Governor Urjit Patel, have been in discussions over the interim dividend transfer ahead of the budget presentation.
“As the RBI’s dividend will have an impact on the budget maths, the government had asked the RBI to indicate the amount of interim and final dividends for the year 2018-19,” said a top source familiar with the matter. In 2017-18, the RBI transferred a surplus of Rs 50,000 crore to the government, which included an interim transfer of Rs 10,000 crore done in the previous financial year, taking the effective dividend for the current year to Rs 40,000 crore.
“The full year’s dividend is likely to be much higher than last year,” the source said. While the total dividend last fiscal was higher than Rs 30,659 crore in 2016-17, it was lower than in the previous three years. The Reserve Bank, which follows July-June financial year, at its board meeting held on August 8, 2018, had approved the transfer of surplus amounting to Rs 50,000 crore for the year ended June 30, 2018. The government’s fiscal year runs from April to March.
The Committee on Economic Capital Framework headed by former RBI Governor Bimal Jalan — announced on December 27, 2018, two weeks after Shaktikanta Das took over as the new Governor in place of Patel — would propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required as well as the central bank holding less provisions than required.
It would also consider treatment of surplus reserves, created out of realised gains, if determined to be held. Former RBI Deputy Governor Rakesh Mohan, who is against transferring a higher surplus to the government, is the Vice Chairman of the committee.
One of the contentious issues in the conflict between the government and the RBI under Urjit Patel was the size of the central bank’s reserves, which at Rs 9.6 lakh crore was then perceived as being excessive by the government. “The use of such a transfer would erode whatever confidence that exists in the government’s intention to practice fiscal prudence,” Mohan said in a recent article.
“Raiding the RBI’s capital creates no new government revenue on a net basis over time, and only provides an illusion of free money in the short term,” he said. In the Budget for 2018-19, the government had estimated a dividend of Rs 54,817 crore from the RBI, nationalised banks and financial institutions. Dividend from public sector enterprises was pegged at Rs 52,494.71 crore by March-end 2019, as per budget documents.
“.in BE (Budget estimates) 2018-19, estimated dividend/surplus from RBI, PSBs and financial institutions was considered at Rs 54,817.25 crore, including Rs 45,000 crore as surplus transfer from RBI, whereas the actual amount of surplus received is Rs 40,000 crore in financial year 2018-19 of the government. The government has requested RBI for an interim surplus on the analogy of previous year when interim surplus was requested by government and transferred by RBI to the government,” Minister of State for Finance P Radhakrishnan said in Rajya Sabha earlier this month (on January 8). With the Lok Sabha elections approaching, the government will need to find more resources to account for the schemes that it has planned in the upcoming budget. Sources said the agriculture ministry, in consultation with the NITI Aayog, is planning a number of measures to provide income support and funding relief to small and marginal farmers.
In the Economic Survey 2016-17, former Chief Economic Adviser Arvind Subramanian had said that the RBI “is already exceptionally highly capitalised” and its capital transfer to the government can be used for recapitalising the banks and/ or recapitalising a public sector asset rehabilitation agency.