Question for Modi govt: How to use $ 24 billion windfall from RBI?

India’s government is deciding whether to use a Rs 1.76 trillion ($24.4 billion) windfall from the central bank to reduce its borrowing or provide a stimulus to an economy that’s slowing sharply.

The Reserve Bank of India’s board approved the record payout on Monday, which includes a dividend of Rs 1.23 trillion and Rs 526.4 billion from its surplus capital, according to a statement. The dividend payment includes Rs 280 billion already transferred to the government in February.

The transfer -- which rivals the stimulus that some Group of 20 nations pumped into their economies during the global financial crisis -- comes amid a slowdown in India’s growth to a five-year low, depressed consumer spending and reports of tens of thousands of job losses in the auto industry.

Finance Minister Nirmala Sitharaman last week announced various measures to spur growth, including hastening the capital infusion into state-run lenders. At the same time, she’s trying to stick to a narrower fiscal deficit goal of 3.3 per cent of gross domestic product for this year.

The Finance Ministry is keen to use the transfer to cut its budgeted borrowings, though it’s yet to make a final decision on how to spend the amount, people with knowledge of the matter said.

The government could cut its planned borrowings if it uses the funds to plug a revenue shortfall in its budget, helping Sitharaman keep the deficit under control. Or it could use the money to finance new spending, like a stimulus package, to help lift growth that’s decelerated to 5.8 per cent in the three months to March.

Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc., estimate India has a tax revenue shortfall of 1 trillion rupees, or 0.5 per cent of GDP.

“Gains from excess RBI dividends are likely to be utilized to bridge the revenue shortfall rather than engage in stimulus measures,” they said in a report.

Bonds rallied on the news of the RBI payout, with the yield on the benchmark 10-year security down four basis points to 6.44 per cent after dropping 13 basis points at the market’s open.

The RBI pays dividends to the government every year, based on the profits from its investments and printing of notes and coins. A snapshot of its balance sheet is due Friday, when the central bank will release its annual report.

Over the past couple of years, the Finance Ministry has been seeking higher payouts from the RBI, arguing the central bank is holding more capital than it needs. It was a source of contention between the government and the former Governor Urjit Patel, who quit in December.

A panel, led by former Governor Bimal Jalan, was set up to study the central bank’s capital framework. Its recommendation, accepted by the RBI’s board on Monday, was that the central bank should hold realized equity of between 5.5 per cent to 6.5 per cent of its balance sheet, compared with the current 6.8 per cent. The board decided to maintain the realized equity level at 5.5 per cent, the central bank said.

The combined payout far exceeds the government’s budgeted estimate of 900 billion rupees as dividend from the RBI this year.

What Bloomberg’s Economists Say

The Reserve Bank of India’s transfer of Rs 1.76 trillion  to the government should offset any revenue shortfall from lower tax buoyancy amid slower growth this year, allowing more room to boost spending. It will also make it easier for the government to meet its budget deficit target of 3.3 per cent of GDP for fiscal 2020.

Samiran Chakraborty and Baqar M Zaidi, analysts at Citigroup Inc. said the government had two options: it can immediately spend part of the amount to stimulate the economy or it can wait for some clarity to emerge on the potential revenue shortfall before spending the money.

Since the government has shown “stellar resolve” in maintaining” fiscal targets, “our bias is to think that the government will follow the latter approach,” they wrote in a note.

Sitharaman said last week the government will immediately inject Rs 700 billion of fresh capital into state-run banks to spur lending.

The banking crisis has weighed on India’s economy, the third-largest in Asia. Data on Friday will likely show growth weakened further to 5.7 per cent in the quarter ended June.

The windfall will probably be pumped into banks, which should help reduce lending rates, Bank of America Merrill Lynch economists Indranil Sen Gupta and Aastha Gudwani said in a note. That would be a “game changer” for the economy, they said.