RBI approves Rs 87,416 crore dividend: Will this undershoot the 5.9% GDP target? — Economists decode

The Reserve Bank of India (RBI) board has approved a surplus transfer of Rs 874.16 billion (USD 10.69 billion) as a dividend to the government for the fiscal year ended March 31, the central bank said in a statement on Friday.

The Budget Estimates (BE) 2023 expected a 17 per cent higher dividend at Rs 48,000 crore from the RBI, public sector banks, and financial institutions for the financial year 2023-24. In the current financial year ending March, it aimed to garner Rs 40,953 crore from RBI and public sector finances. However, RBI's dividend at Rs 874 billion exceeds the Union Budget Estimate of Rs 480 billion which includes dividends from RBI and PSU banks.

Economists decode the reasons behind issuing higher dividends this time and how will it contribute to the estimated GDP of the country in the coming fiscal. 

Dividend and GDP

From a fiscal perspective, the dividend represents additional revenue of 0.2 per cent of GDP, thus the question arises will this undershoot the 5.9% GDP target, or will India surpass the target after the RBI issued higher dividends? 

“Our model indicates that nominal GDP growth could be around 9 per cent. This implies that tax collection growth could be lower than what is assumed in BE. There is also the risk that disinvestment proceeds could undershoot BE,” Gaura Sengupta, economist at IDFC First Bank, said. 

Economists also highlighted the fact that apart from RBI dividends, dividends from other public service banks will also help garner more revenue, which will eventually contribute to the GDP of the country. 

“Higher revenue collections for the government imply it has more to spend without breaching the deficit target. Higher spending would imply further push to investment cycle, which will support India’s GDP growth in the wake of a slowdown in the global economy,” Sonal Badhan, economist at Bank of Baroda, said. 

Better revenue generation

 As pointed out by economists, GDP growth will be primarily driven by better revenue generation and a major factor that will drive the revenue generation is large gross dollar sales. 

“The outperformance is supported by large gross dollar sales of USD 206.4 billion in FYTD23 (till Feb 2023) v/s USD 96.7 billion in FY22. The revenues from dollar sales are likely to be substantial given that profits are calculated based on the historical cost of dollar purchases. RBI has likely maintained risk buffers at the upper end of the recommended range. This is reflected by the increasing contingency risk buffer to 6 per cent of total assets versus 5.5 per cent last year,” Sengupta said. 

As per the economists, the dividend has exceeded government estimates owing to higher earnings on sales of forex; revaluation gains (owing to stronger USD), and adjustments in reserves as per the Bimal Jalan committee.

Will it help surpass the GDP target? 

While the fall in the inflation rate may bring some relief to the economy, on the contrary, the economists cautioned that it may affect revenue generation too. Thus, they pointed out that it may be too early to say with absolute certainty that FY24 fiscal deficit will surpass the 5.9 per cent GDP target. 

“This is because the sharp reduction in inflation (in particular WPI inflation) implies that FY24 nominal GDP growth could be lesser than what is assumed in the Union Budget of 10.9%,” Sengupta added. But the economists expect that higher dividends will surely help meet the target if no other adversities arise in the coming quarters. 

“As inflation slows, it will have an impact on GST collections. Further, disinvestment proceeds will also have to be watched closely. Thus, for the time being, we continue to expect the fiscal deficit to come in at 5.9%,” asserted Badhan. 

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