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RBI's ?2 lakh-crore boost may help India's new govt have an easy-peasy run to achieve a goal.

Date: 28-05-2024
Subject: RBI's ?2 lakh-crore boost may help India's new govt have an easy-peasy run to achieve a goal
The robust dividend announced by the Reserve Bank of India (RBI) may help the newly-elected Indian government meet the 5.1 per cent of GDP deficit target for the fiscal year ending March 2025 (FY25), said Fitch Ratings in its latest report on Monday.

It further stated that the dividend income could be used to lower the deficit beyond the current target.

The RBI on May 22 announced a record-high dividend transfer to the government, equivalent to 0.6 per cent of GDP (Rs 2.1 lakh) from its operations in FY24. The figure has surpassed the 0.3 per cent of GDP expected in the FY25 budget from February. Hence, the rating agency said that it will aid the autho ..

Although the detailed breakdown by RBI is awaited, Fitch termed the higher interest revenue on foreign assets as a significant driver of the higher RBI profits.

The new government’s budget, following the release of election results in June, is likely to be presented in July and it will determine how the dividend will be used.

Govt aims to...
The government had signalled its aim to narrow the deficit gradually to 4.5 per cent of GDP by FY26. RBI-led Monetary Policy Committee (MPC) member Ashima Goyal had said that she sees potential for a slight reduction in the targeted fiscal deficit for the current year, suggesting that India could comfortably achieve its fiscal consolidation goals.

"Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term," Fitch said in its report.

The Fitch report cited two alternatives which can be used by the newly-formed government in its post-election budget.

First, the government could opt to keep the current deficit target for FY25, and the windfall could allow the authorities to further boost spending on infrastructure, or to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment. Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1 per cent of GDP ..

The choice by the new government will provide a clarity around its medium-term fiscal priorities.

A Reuters report stated that the incoming government has two primary avenues to consider for utilising the surplus: reducing the fiscal deficit or increasing public expenditure. Each option has distinct implications for different sectors of the economy.

Increasing public expenditure: Alternatively, the government could boost spending on infrastructure or introduce populist measures. Equity markets would likely support this route, as increased spending can stimulate economic activity and growth. The Sensex’s rise by 1,300 points in response to the surplus news underscored investor optimism about potential expenditure increases.

Transfers from RBI to the government can be significant at the margin for fiscal performance, h ..

A cheque worth Rs 2 lk cr for new govt
On June 4, India will usher in a newly elected government, and with it, a significant financial boon awaits: a surplus transfer of Rs 2.11 lakh crore from the Reserve Bank of India (RBI). This windfall presents a strategic opportunity for the new administration to shape the country’s fiscal landscape over the next eight months. Economists and investors alike are speculating on how this substantial amount could be utilised.

In the run-up to the elections, different political parties have laid out their fiscal visions. The Congress has promised substantial welfare measures, including annual cash handouts to women and jobless youth, and a commission to waive farmers' debts. In contrast, Prime Minister Narendra Modi and the Bharatiya Janata Party (BJP) have refrained from making similar populist promises, focusing instead on infrastructure development.

According to a Reuters report, Shreya Sodhani, an economist ..

Economists suggest that using the surplus to reduce the fiscal deficit could have long-term benefits for India's sovereign ratings. S&P Global Ratings Analyst YeeFarn Phua pointed out that the additional dividends from the RBI, amounting to around 0.35 per cent of GDP, could support fiscal consolidation if directed towards deficit reduction. This would potentially improve India's sovereign rating over time, currently affirmed at 'BBB-' with a stable outlook by S&P.

The new governm ..

 Source Name : Economic Times

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