Guarded transfer of dividends by the Reserve Bank of India (RBI) to the government in its central board meeting on Friday has opened the door for deficit monetization as the government prepares to unveil its second fiscal stimulus package amid growing concerns over growth revival.
In its 584th central board meeting, RBI decided to transfer ₹57,182 crore as surplus to the government for the accounting year ended 30 June, slightly less than the ₹60,000 crore budgeted by the government for FY21. The fresh transfers are a fraction of the record ₹1.76 trillion that the RBI had transferred to the government in the year-ago, including ₹1.23 trillion as dividend and ₹52,640 crore as a transfer from contingent reserves.
A government official with knowledge of the internal deliberations at RBI’s board meeting said central bank officials gave a lot of information on how RBI lost out on its investments in the international market during the last accounting year, which impacted the dividend amount. RBI (July-June) and finance ministry (April-March) have been following different accounting years, but the central bank has now agreed to synchronize its financial year with that of the government in tune with the Bimal Jalan panel recommendations. Subsequently, RBI’s 2020-21 accounting year will be for nine months from 1 July 2020 to 31 March 2021. Thereafter, financial years of both the Centre and the central bank will start on 1 April.
“It is not a do or die situation for the government when it comes to dividends this year. It does require more resources, but fiscal measures through deficit financing is a plausible option as RBI is favourably disposed to the idea," the government official cited above said on condition of anonymity.
The Centre is working on its next set of fiscal measures after announcing a ₹20-trillion package in May, which was heavily tilted towards liquidity support and government guarantees. Mint on 10 August reported that the next stimulus will be timed after examining the June quarter gross domestic product (GDP) growth figures to be released by August-end. “The focus will be on migrant workers and urban joblessness. Under Atmanirbhar Bharat, more policy reforms may be announced, including production-linked incentive schemes for consumer goods sectors," the report had said quoting an official.
While recognizing that going into the covid-19 crisis, India had limited fiscal space, Changyong Rhee, director, Asia Pacific, International Monetary Fund (IMF), had said last month, in an extreme situation, where India needs to issue a large amount of government bond, some degree of monetization of deficit may be unavoidable. “But that has to be met with a concrete plan to get back to normal without hurting the central bank’s independence." IMF cautioned that India needs to contain covid-19 on priority to make recovery sustainable.
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