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Following the release of election results in June, the new government’s budget, likely to be presented in July, will determine the allocation of this dividend. The government has indicated a gradual approach to narrowing the deficit, aiming for 4.5 per cent of GDP by FY26. Sustainable deficit reduction, particularly if supported by durable revenue-raising reforms, would positively impact India’s sovereign rating fundamentals over the medium term.
The RBI’s larger-than-expected dividend to the government will aid in meeting the 5.1 per cent of GDP deficit target for FY25.
The ₹2.1 trillion (approximately $25.25 billion) dividend could also reduce the country’s deficit beyond current goals.
Post-election, the new government will decide on allocation, impacting medium-term fiscal priorities.
Recently, the RBI announced a record-high dividend transfer to the government, amounting to 0.6 per cent of GDP (₹2.1 trillion) (approximately $25.25 billion) from its operations in FY24. This figure significantly exceeds the 0.3 per cent of GDP anticipated in the FY25 budget from February, aiding the authorities in achieving their near-term deficit reduction goals. A key factor behind the increased RBI profits appears to be higher interest revenue on foreign assets, though the central bank has yet to provide a detailed breakdown, as per Fitch Ratings.
In the post-election budget, the new government faces two options. The first option is to maintain the current deficit target for FY25, using the windfall to boost spending on infrastructure or offset unexpected spending increases or lower-than-budgeted revenue, such as from divestments. Alternatively, the government could save all or part of the windfall, potentially reducing the deficit below 5.1 per cent of GDP. This decision will offer greater clarity on the government’s medium-term fiscal priorities.
RBI transfers to the government can significantly influence fiscal performance, depending on factors such as the size and performance of assets on the central bank’s balance sheet and India’s exchange rate. These transfers may also be impacted by the RBI’s perspective on the appropriate level of buffer to maintain on its balance sheet. Due to the potential volatility of these transfers, there is considerable uncertainty about their medium-term trajectory, and it is unlikely that dividends as a share of GDP will remain at such a high level.
Fibre2Fashion News Desk (DP)
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