On Wednesday, the central board of the Reserve Bank of India approved the transfer of Rs 2.1 lakh crore as surplus to the central government. This is a fiscal bonanza for the Centre as it is considerably higher than what was factored in earlier — in the interim Union budget 2024-25, the government had estimated the dividend/surplus of RBI, nationalised banks and financial institutions at Rs 1.02 lakh crore. Alongside, the central board has also decided to increase the contingency risk buffer to 6.5 per cent of the central bank’s balance sheet in 2023-24, up from 6 per cent in 2022-23. This buffer is meant for a “rainy day”, a financial stability crisis, and is maintained by the central bank, considering “its role as lender of last resort”. Both the surplus and the buffer have been determined on the basis of the economic capital framework, as recommended by the expert committee headed by former RBI Governor Bimal Jalan.
The higher than expected transfer could be a consequence of an increase in interest income from the central bank’s foreign and domestic assets and forex transactions. This has created considerable fiscal space for the next government when it presents the full budget for the year after the ongoing national elections. This space, which works out to around 0.4 per cent of GDP, can be utilised in either of the following ways. It can use this to bring about a steeper decline in the government’s fiscal deficit than what has already been outlined — in the interim budget, the government had promised to bring down its deficit from 5.8 per cent of GDP in 2023-24 to 5.1 per cent in 2024-25. A higher transfer could help offset possible revenue shortfalls in areas such as disinvestment. The next government could also choose to increase the amount allocated for capital expenditure in the interim budget — the budgeted capex was pegged at Rs 11.1 lakh crore or 3.4 per cent of GDP. Or it could opt for a combination of the two. The impact is already being felt in the markets with the 10-year bond yield falling.
In the Union budget 2021-22, the government, while announcing the deficit of 9.5 per cent of GDP for 2020-21, had declared its intent to bring it down to below 4.5 per cent by 2025-26. In subsequent budgets, it has reaffirmed its commitment, and has stuck to the path of fiscal consolidation. Alongside, it has steadily increased its allocation for capital expenditure. The centre’s capex to GDP ratio has edged upwards from 2.5 per cent of GDP in 2021-22 to 3.23 per cent in 2023-24, and further to 3.4 per cent in 2024-25 (interim budget), improving the quality of its spending. The next government must continue down this path.
