Abundant liquidity post-demonetisation with banks and resultant reverse repo measures by the Reserve Bank of India as well as cost of printing new currency notes will result in fall in the central bank’s transfer of surplus to the union government this financial year, almost half of what was given in 2016-17.
The RBI said it would transfer Rs 30,659 as surplus to the government in 2017-18, much lower than last year’s Rs 65,876 crore. The Union Budget for 2017-18 projected receipts of Rs 75,000 crore from the RBI, public sector banks and financial institutions, against a little over Rs 76,000 cr in 2016-17. Of this, public sector banks and financial institutions are expected to chip in Rs 10,000 crore.
The Union government’s fiscal deficit target could be jeopardised by lower dividends and any cutbacks in capital expenditure will hurt the government efforts to revive the investment momentum.
“So, instead of RBI getting money from repo operations, it gives interest rate to banks through reverse repo,” he explained.
Reverse repo currently stands at 5.75 per cent.
Cost of printing comes to about Rs 2.5 for new 500 currency notes a piece and Rs 3.50 for new 2,000 notes a piece, experts say.
At a glance
- RBI said it would transfer Rs 30,659 as surplus to govt in 2017-18, lower than last year’s Rs 65,876 crore
- The Budget projected receipts of Rs 75,000 crore from RBI, PSU banks and financial institutions, against a little over Rs 76,000 cr in 2016-17. Of this, PSU banks and financial institutions are expected to chip in Rs 10,000 cr
- Govt’s fiscal deficit target could be jeopardised by lower dividends; any cutbacks in capex will hurt its efforts to revive investment momentum
- Reverse repo currently stands at 5.75%
- Cost of printing comes to Rs 2.5 for new Rs 500 a piece and Rs 3.50 for Rs 2,000 a piece
- Centre’s fiscal deficit in first quarter has reached 80.8% of target for 2017-18. The figure was 61.1% a year ago
- India’s economic growth is projected to decline to 6.75-7.5% in 2017-18, from 7.1% in 2016-17
Rupee appreciated by 4.7 per cent from average value of Rs 67.65 in November, 2016 to Rs 64.45 in July (last month of RBI’s financial year).
Once it is over, it would be known how much liabilities it will extinguish and how much transfer would come to the union government. But, this may come only next financial year, after the RBI’s financial year ends in June, 2018.
Madan Sabnavis, chief economist with CARE Ratings, says the Rs 35,000 crore decline in dividend from the RBI constituted 0.2 per cent of the GDP and this development could widen the fiscal deficit from 3.2 per cent to 3.4 per cent in 2017-18.
The Centre’s fiscal deficit in the first quarter has reached 80.8 per cent of the target for 2017-18. The figure was 61.1 per cent in the corresponding period of the previous fiscal year.
Sabnavis says the axe might fall on capital expenditure if the fiscal deficit target was to be met.
India’s economic growth is projected to decline to 6.75-7.5 per cent in 2017-18 from 7.1 per cent in 2016-17. The government has presented a medium term framework of expenditure that shows capex rising 10 per cent in three years, starting in 2017-18.
Nayar says the smaller dividend from the RBI would need to be offset through higher tax revenue because surpassing the budgeted disinvestment target would pose a challenge.
“The pattern of monthly tax revenue growth may display some change in the months immediately after the introduction of the GST on July 1,” she added.
Pant says direct tax collections could provide some buffer to the Centre. Direct tax receipts in the first four months of 2017-18 were 19.1 per cent higher as refunds declined even as the gross amount paid by companies reflected their struggle with the GST.
Ranen Banerjee, partner with PwC, does not agree that a cut in capex would hurt economic growth. He says capex was generally overestimated. Also leakages in subsidy payouts were being plugged through cash transfers, he added.