Government wants RBI’s help to fill budget gap

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The COVID-19 pandemic has created a huge downfall in the Government’s revenue. The Finance Minister, Nirmala Sitharaman is expecting another pay-out from the RBI in the coming weeks. The question is whether this will be able to cover the shortfall.

The board of the Reserve Bank of India, headed by Governor Shaktikanta Das, helda meeting on Friday. There is a hope that RBI will announce its dividend pay-out as august is usually the month the central bank makes its annual transfer to the government. Last year the RBI board approved apayment of 1.76 trillion rupees to the government, including 1.23 trillion rupees.New Delhi has budgeted for a transfer of 600 billion rupees this year, but the local media is expecting much more. Whereas the economists and analysts are expecting between 4oo billion to One Trillion.

The Standard Charter Plc, Mumbai expects the pay-out somewhere between 4oo billion to 500 billion Rupees. It may fall short of the budgeted level and will lead to fiscal pressures.The Standard Charter predicts that the Government’s fiscal deficit may surge 7.4 percent of Gross Domestic Product during this year. As India ‘s economy heads for its first full-year recession in more than four decades, revenue is falling well short of expectations. The government will help bridge the funding gap by collecting more cash from the central bank, selling government properties, and driving up borrowing, which is now at record high rates.

According to Bloomberg’s economist, the RBI and Government need to go for monetization of fiscal deficit. However, the transfer of a few hundred billion rupeesis not likely to bridge the revenue shortage.

With restricted alternative revenue sources and a budget shortfall already 83 percent of the full-year target in the first three months of the fiscal year, calls are increasing for the RBI to directly fund the fiscal deficit. This strategy has already been embraced by central banks in Indonesia and the Philippines, but those opposed to debt monetization in India cite threats to the nation’s credit rating and inflation, which is already above the RBI target range of 2%-6 percent.

Each year, the RBI pays the government dividends based on the income from its operations, both domestically and abroad, and the printing of notes and coins. The government has been exerting pressure on the central bank in recent years to increase its pay-outs. Last year, an expert committee suggested that the central bank with some of its surplus capital might part.