Lower RBI Dividend Brings Fiscal Math Into Question

When the finance minister presented the budget on February 1, accounts for the year showed that the government was expecting a hefty dividend from the Reserve Bank of India (RBI), nationalised banks and financial institutions put together.

Rs 74,901 crore was the number.

At the time, that number didn't look extraordinary. In fiscal 2017, the government had received Rs 65,876 crore from the RBI. If a similar amount, or even a slightly lower amount was being expected this fiscal, an amount close enough to the nearly Rs 75,000 crore budgeted could accrue to the government's coffers.

Then came the shocker. The dividend transferred by the RBI to the government halved to Rs 30,659 crore, which led economists to question whether the government should brace itself for a shortfall in revenues from this source. Fears of a lower dividend came against the backdrop of stretched government finances (over 80 percent of the target has been exhausted in the first quarter alone) and uncertainty over tax revenues following the implementation of GST.

Government officials, however, tried to downplay the lower dividend, saying that the amount received was along expected lines.

“The RBI dividend has come down, but it is in line with what was budgeted. So, in that sense it doesn't represent something new,” chief economic adviser Arvind Subramanian told reporters after presenting his mid-year economic survey last week. The survey had also noted that the fiscal outlook for the year is uncertain.

If Subramanian is correct and the government was indeed budgeting only about Rs 30,000 crore in dividend from the RBI, then it begs the question - is the government expecting a Rs 44,000 crore dividend from financial institutions? If so, what is the government thinking?

Data computed by BloombergQuint from budget documents shows that public sector banks and financial institutions paid the government a dividend of Rs 31,503 crore in 2013-14. The number has been arrived at by deducting the publicly disclosed RBI dividend from the actual ‘dividend from RBI, nationalised banks and financial institutions' category in the budget documents.

In 2014-15, the dividend fell to Rs 5462 crore and in 2015-16, the government received Rs 15,614 crore from this category of companies. Based on revised estimates for 2016-17, the government was budgeting a dividend of Rs 10,295 crore from banks and financial institutions. The actual receipts for 2016-17 will only be available at the time of the next budget.

Given the past history, is it realistic to expect a Rs 44,000 crore dividend from banks and financial institutions this year?

A former RBI official told BloombergQuint on condition of anonymity that a high level of stressed assets and weak credit growth will mean that public sector banks will not be in position to pay hefty dividends to the government.

Most banks have seen profits shrink because of high provisions against bad loans. In the first quarter of the current fiscal, for instance, the listed public sector banks reported a cumulative loss of Rs 277 crore, shows data compiled by BloombergQuint.

The official quoted above, however, added that the targeted fiscal deficit of 3.2 percent for the year may be achievable. ‘Buoyant' direct and indirect tax revenues would make up for any shortfall caused by a lower dividend from the RBI, said this official.

NR Bhanumurthy, a professor at National Institute of Public Finance and Policy (NIPFP) agreed that both direct and indirect tax revenue could be higher than what was projected in the budget. However, more clarity would emerge from GST collections next month, he said.

In a report dated August 11, Kotak Economic Research noted that the lower RBI dividend had disturbed the fiscal math by 0.2 percent of GDP. The research house added that it may be too early to determine the revenue side of equation.

“We need to watch for cues from direct tax collection, indirect tax collections, and any divestment upside,” said the report adding that the government can also opt for expenditure cuts later in the year if needed.

In the first quarter of the current fiscal, the government front-loaded revenue expenditure and exhausted 32 percent of its budgeted spend. 22 percent of the budgeted capital expenditure for the year has been used up in the first quarter.