RBI board approves Rs 28,000-crore interim dividend to government

Reserve Bank of India

The Reserve Bank of India (RBI) board on Monday approved transfer Rs 28,000-crore interim dividend to the government ahead of the general elections to meet the welfare expenditures and the fiscal deficit breach.

This is the second straight year that the RBI has announced an advance payment to Prime Minister Narendra Modi’s government. The government has already received Rs 40,000 crore from the central bank during the financial year 2018-19.

“Based on a limited audit review and after applying the extant economic capital framework, the board decided to transfer an interim surplus Rs 280 billion (Rs 28,000 crore) to the Central government for the half-year ended December 31, 2018. This is the second successive year that the Reserve Bank will be transferring an interim surplus,” the RBI said in a statement.

This was the first board meet after the interim budget 2019-20 was announced on February 1.

Transfer of a part of its profit by the central bank would help meet the need for cash to fund Modi-led government’s populist pledges ahead of the national election.

In approving the measure, the RBI is following Turkey’s central bank that helped the government before municipal elections in March. In a similar way, the RBI dividend will help Modi government partly bridge a budget gap and could be key to funding an income-support programme for farmers which is estimated to cost Rs 75,000 crore ahead of the Lok Sabha elections due by May.

The government would need cash after allocating Rs 20,000 crore towards the first instalment of the programme by March 31. The cash support — promised to about 12 crore farmers with up to 2 hectare (4.9 acre) of land through three payouts of Rs 2,000 per year — is Modi’s last attempt at reversing fortunes after the BJP lost control of three key states in regional elections in December.

The transfer is “based on a limited audit review and after applying the extant economic capital framework”, the central bank said in a statement. The RBI’s financial year runs from July to June. The government has, in all, budgeted Rs 74,140 crore in dividends from the RBI and the state-run lenders in the year ending March 31 and has pencilled in Rs 82,291 crore for the next year.

The demand on the RBI for more dividends and to part with a greater share of its capital has been a contentious issue between the central bank and the government. It resulted in a public standoff last year and is seen as one of the reasons for the abrupt exit of then RBI Governor Urjit Patel.

The Finance Ministry asked the RBI to transfer about Rs 27,000 crore of surplus capital withheld by it in the previous two financial years. Separately, Finance Ministry officials estimate the RBI has at least Rs 3.6 trillion more capital than it needs, which they say can be used to help bolster weak Indian banks.

The first-half was over in December 2018. The total surplus transfer to the government for 2018-19 is expected to rise to Rs 68,000 if the RBI board agrees to pay it the interim dividend of Rs 28,000. The RBI had made a dividend payout of Rs 30,659 crore for the fiscal year ending June 2017, about 63 per cent higher than the previous year (2016-17).

The interim dividend will help government ease fiscal pressure and also aid it in giving the economy a boost before the crucial general elections in April-May this year. The government has projected the fiscal deficit target at 3.4 per cent for the financial 2019-20 in the Interim Budget (2019-20).