RBI’s Historic Dividend Payout: A Fiscal Lifeline for the Government

The Reserve Bank of India (RBI), while not a profit-making entity, generates surplus income through its operations, including interest earned on foreign exchange reserves and government securities.

After covering operational expenses and provisions, the RBI transfers the remaining surplus to the government as a dividend. This dividend amount is determined by a formula stipulated in the Reserve Bank of India Act, 1934.

Recently, the RBI announced a significant increase in its dividend payout to the central government for the fiscal year 2023-24 (FY24). This decision aims to provide the government with crucial fiscal space as it navigates budget management challenges. The RBI approved a dividend transfer of ₹2.11 trillion to the government for FY24, marking a substantial 141% increase compared to the dividend paid in FY23.

A portion of this unprecedented dividend payout will be utilized to improve the fiscal deficit target for FY25 from 5.14% of gross domestic product (GDP) to approximately 4.9-5%. The fiscal deficit for FY25 is estimated at Rs.16.85 trillion, as outlined in the interim budget presented in February.

For FY24, the Centre revised its fiscal deficit target to 5.8% of GDP, lower than the budgeted estimate of 5.9%, driven by robust tax collection and higher dividend payouts. Direct tax revenue grew by 17.7% in FY24 after adjusting for refunds, while indirect tax collections exceeded the revised estimates of Rs.14.84 trillion. The gross GST collection for the financial year stood at Rs.20.18 trillion, surpassing the previous year’s collection by 11.7%, according to CBIC chairman Sanjay Kumar Agarwal. However, excise duty receipts decreased from ₹3.39 trillion in FY24 to ₹3.04 trillion in the revised estimates.

The government may consider unveiling a definitive medium-term growth path along with a roadmap for fiscal consolidation. Despite global economic challenges, the government is committed to providing domestic policy support to sustain growth.

The additional revenue from the RBI’s dividend will offer the government greater flexibility in managing spending priorities. This revenue can be directed towards funding critical social welfare programs, infrastructure development projects, or reducing public debt. Consequently, the government can reduce its dependence on market borrowings, currently budgeted at ₹14.13 trillion (gross), which would help lower borrowing costs. Lower-than-expected government borrowings have already had a softening impact on yields, with the yield on the new benchmark 10-year government securities falling below 7%. Further declines are expected, with the yield potentially dropping to as low as 6.75% if the RBI implements rate cuts in the second half of the fiscal year.

While the RBI’s dividend payout offers a temporary reprieve for India’s fiscal situation, achieving long-term fiscal sustainability requires a comprehensive strategy focused on revenue generation, expenditure management, and economic growth. By implementing reforms in these areas, the government can ensure a stable and healthy fiscal environment, fostering India’s long-term development.

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