No aid to government finances during the pandemic?

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The Finance minister of India, Nirmala Sitharaman is expecting another payout from the central bank in the coming weeks, but it’s unlikely to plug in the huge government revenue hole created by the pandemic.

RBI’s board had approved a payment of 1.76 trillion rupees ($23.5 billion) to the government, which included 1.23 trillion rupees as dividends and 526.4 billion rupees from its surplus capital last year. This year, New Delhi has budgeted for a 600 billion-rupee transfer, but local media authorities are expecting more. Anything between 400 billion to 1 trillion rupees is expected by analysts and economists.

The economy is heading for its first full-year contraction in more than four decades. Due to this reason revenue is falling well short of projections. Simultaneously, the government is being forced to spend more to cushion the fall due to the pandemic, straining the budget deficit. The government can help to reduce the funding gap by drawing more cash out of the central bank, sell state assets and push up borrowing, which is already at a record high.

Experts analyzed that the government’s fiscal deficit will rise to 7.4 percent of gross domestic product in the current fiscal year which would be more than double the government’s original target.

The first three months of the fiscal year were standing at 83% of the full-year target, with limited alternative revenue sources and the budget gap. Several calls are growing for the RBI to directly finance the fiscal deficit. This approach has already been adopted in the central banks of Indonesia and the Philippines, but those opposed to debt monetization in India cite risks to the nation’s credit rating and inflation, which is now higher than the RBI’s 2%-6% target range.

Abhishek Gupta, an Indian economist had said that to make up for that shortfall of the government, the RBI needs to go in for monetization of fiscal deficit.

The Central bank pays dividends to the government each year, based on the profits from its investments, both home and abroad, and printing of notes and coins. Recently, the government has been pushing  a lot of pressure on the central bank to increase its payouts.

A Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai said that they expect a dividend of 1.05 trillion rupees based on higher income from domestic assets. He also added that he expects the central bank to set aside more than 700 billion rupees to maintain capital buffers.