Will part of RBI's Rs 2.11 lakh crore bonanza be used to bridge likely gaps in disinvestment proceeds?

Last week, the Reserve Bank of India (RBI) surprised everyone with a dividend payment of Rs 2.11 lakh crore to the government, which is double the projected Rs 1.02 lakh crore in the Interim Budget 2024-25 for dividends from RBI, nationalized banks, and financial institutions. 

In fact, the total targeted amount set in the budget for dividends and profits, which also includes central PSUs, was pegged at Rs 1.50 lakh crore. 

Clearly, there is a surplus overflowing from the dividend and profits account.

Let's put things in perspective to understand the Rs 2.11 lakh crore number. The total dividend and profits have a share of roughly one-fifth in the non-tax revenues and nearly 4.0 percent in the total tax receipts. So, it is an important element, but not very important if one looks at the total projected revenue receipts of Rs 40.30 lakh crore. 

While the next government’s Budget following the Lok Sabha results in July will determine how the dividend will be used, it could help in offsetting any shortfall in other revenue items or lending a helping hand in reducing the fiscal deficit or pushing up expenditure, especially capital expenditure. Let's understand each of these options:

Filling the gaps in disinvestment proceeds

Three years ago, the government announced a strategic disinvestment policy to set a clear road map for the privatization of strategic and non-strategic PSUs. But the government has consistently missed the disinvestment target set in the Budgets. For instance, the government managed to receive Rs 16,500 crore as against Rs 51,000 crore projected for 2023-24. In the Interim Budget, finance minister Nirmala Sitharaman did not mention the disinvestment target in her speech, though the Budget document carried a figure of Rs 50,000 crore for 2024-25. While the government is pursuing disinvestment in IDBI Bank Limited, Projects & Development India Ltd, HLL Life Care Limited, NMDC Steel Limited, Shipping Corporation of India, and BEML Ltd ( formerly Bharat Earth Movers Ltd), there is every possibility that not all will be completed due to market conditions or interest from investors and other procedural issues. 

It is also the policy of Department of Investment and Public Asset Management (DIPAM)  to give priority to value creation in central PSUs and planning disinvestment transactions at the right price and right time without value erosion. The bonanza from RBI could be used to fill the gaps in disinvestment proceeds.

Reduce fiscal deficit 

The most-talked about option is to deploy a part of the RBI's dividend to reduce the fiscal deficit to convey fiscal consolidation. As part of the government's glide path for fiscal deficit reduction after the pandemic spending, it has set the fiscal deficit target of 4.5% of GDP by FY26. The fiscal deficit is set to reduce from 5.9 percent in 2023-24 to 5.1 percent in 2024-25. The government could use the RBI's dividend money to reduce the fiscal deficit to 5.0 percent or below , which will be seen very positively by the markets, foreign investors, and global rating agencies. This will also ease pressure on the gross and net market borrowings, which are estimated at Rs 14.13 lakh crore and Rs 11.75 lakh crore respectively in 2024-25. 
Fitch Ratings says that a sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term.

Push the capex

The government has done record capital expenditure post-COVID to compensate for the lower private capex. But as the fiscal space is shrinking because of the fiscal consolidation target, the power of the government to support via capex is also relatively reducing. While private capex is increasing selectively for some sectors, the engine is not firing on all cylinders. The government has set an allocation of Rs 11.11 lakh crore for capital expenditure in the interim budget, which is higher by about 11 per cent compared to the previous fiscal. 

The government could increase the capex in the budget in July, which would be a very positive development. Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA Ltd says that increasing the funds available for capex would certainly boost the quality of the fiscal deficit. 

"The additional spending , however, may be difficult to be incurred within the 8-odd months left after the Final Budget is presented and approved by Parliament," says Nayar.

Bridge shortfall in revenue receipts

It's not certain that the government's projection for revenue receipts will go as projected in the interim budget. There is every possibility that some items may not generate revenues as planned. For instance, there was a shortfall in the 2023-24 numbers for customs and excise duties receipts between budgeted versus revised estimates. The customs collections were down by Rs 14,420 crore and excise duties receipts were down by a staggering Rs 35,400 crore.

Make up for spending surprises

In an election year, there are always surprises as the government tends to spend more on welfare areas or areas where the common man gets impacted. There could be a situation where some of the spending goes beyond the budgeted amount, and the additional collection from RBI would come in handy.