Analysts rule out big-bang stimulus spend by govt despite RBI windfall

Analysts say lacklustre tax collections and weak growth which is threatening the fiscal deficit target of 3.3 per cent of GDP are some of the reasons that will limit the government's spending power

Analysts, for now, have ruled out the possibility of the government going overboard with stimulus measures to prop-up the slowing economy despite the windfall gain received from the Reserve Bank of India (RBI) in the form of transfer of record surplus of Rs 1.76 trillion. 

Lacklustre tax collections and weak growth which is threatening the existing fiscal deficit target of 3.3 per cent of gross domestic product (GDP), they say, are some of the reasons that will limit the government's spending power. 

Analysts at Nomura, for instance, expect a shortfall in tax revenues for the current financial year 2019-20 (FY20) at Rs 1 trillion, or 0.5 per cent of GDP, amid a slowing economy. Thus, the gains from excess RBI dividends, they feel, are likely to be utilised to bridge the revenue shortfall rather than engaging in stimulus measures.

“The ultimate size of the dividend transfer to the government is higher-than-expected. In our view, the dividend transfer will help the government achieve this (fiscal deficit) target, while leading to reserve money creation, and reducing pressure on the RBI to engage in open market operations (OMO) buybacks to maintain surplus liquidity,” wrote Sonal Varma, managing director and chief India economist at Nomura in a recent co-authored report with Aurodeep Nandi.

Analysts at Emkay Global, too, share the same thought and expect the government to stick to its fiscal deficit target of 3.3 per cent for FY20.

“The excess dividend of Rs 420 – 580 billion translates to 22-31 basis points (bps) of GDP, which can be used to bridge the possibility of a shortfall in tax revenues growth. The fiscal math looks a lot more achievable following this transfer,” wrote Sunil Tirumalai, head of research at Emkay Global in a co-authored report with Kruti Shah.

PSU bank recap

Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, however, shares a different view and believes some portion of this windfall will be used in the proposed Rs 70,000 crore recapitalisation of public sector banks (PSBs) announced last week. The government, he says, will infuse capital into PSU banks with excess RBI capital, who in turn, will park it in a government account with the central bank.

“We highlight that using excess RBI capital to recapitalise PSU banks should be liquidity – and fiscal deficit – neutral. Our banking analysts assume that Rs 20,000 crore will be used to write off non-performing loans (NPLs),” he Gupta wrote in a co-authored report with Aastha Gudwani.

At the bourses, PSBs have been huge underperformers since the presentation of the Budget on July 5 till last Friday – Nifty PSU Bank index down nearly 25 per cent as compared to 7.5 per cent fall in the Nifty 50 – when the government announced a slew of stimulus measures for the economy, including their Rs 70,000 crore recapitalisation plan.

All stocks in that comprise the index lost ground, with Allahabad Bank, Oriental Bank of Commerce (OBC), Indian Bank and Bank of India slipping 29 per cent to 34 per cent during this period, ACE Equity data show.