Govt shouldn’t stretch RBI’s reserves too thin

The Centre can continue with its high capex focus without worrying too much about the fiscal situation.
Reserve Bank of India
Reserve Bank of India (Photo | PTI)

The markets have cheered the Reserve Bank of India’s decision to transfer a record surplus of almost Rs 2.11 lakh crore to the government coffer. First of all, the bonanza will give the exchequer enough fiscal leg room in the current financial year. The bumper surplus transfer also means lower borrowings and, therefore, more benign yields on government securities. This could, in turn, mean lower interest rate in the near future.

These benefits, however, should not make the government lose sight of the fact that such large transfer of RBI surplus has its own downsides. The government should be wary of stretching thin the central bank’s reserve, which at times is testament to the strength of the economy. The strength of RBI’s balance sheet often plays a decisive role in getting funds from international agencies like the IMF.

The RBI’s surplus transfer for FY24 is 2.5 times that of the previous year. The government had budgeted for Rs 1.02 lakh crore dividend from the RBI and PSU banks. However, the surplus transfer turned out to be more than double that, touching 0.35% of the GDP. The government can, therefore, hope to bring down its FY25 fiscal deficit to below 5% from the budgeted target of 5.1% of the GDP.

The Centre can continue with its high capex focus without worrying too much about the fiscal situation. The additional dividend also increases the chances of the government achieving the 4.5% fiscal glide path by FY26. This should bolster India’s case for a rating upgrade.

By all means, the higher-than-expected RBI dividend signifies many positives for the economy, including lower yields on government bonds that should reduce the cost of capital for private sector as well. However, the government must not over-exploit the central bank’s reserves and surpluses. The surplus transfer does fulfil the Bimal Jalan Committee recommendations, yet the government’s over-dependence on RBI resources to plug fiscal leakages raises many moral questions.

It also gives it an excuse for being fiscally ‘irresponsible’ without consequences. This should not be a permanent solution for any government’s fiscal profligacy. The RBI has emerged as a strong and mature central bank globally, and the credit to this goes to its conservatism. Any laxity in this approach may not serve India in the long term.

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