A day after Union Finance Minister Arun Jaitley asserted that the government did not need the Reserve Bank of India’s (RBI’s) money to bridge the fiscal gap, Economic Affairs Secretary Subhash Chandra Garg said on Wednesday an interim dividend would be sought from the central bank.
Garg also said the composition and structure of the expert committee on the Economic Capital Framework, which would determine the appropriate level of reserve the RBI should hold, had almost been agreed upon. He also said the Supplementary Demand for Grants, expected to be tabled in Parliament on Thursday, would contain the details of additional capital infusion in state-owned banks through bank recapitalisation bonds.
On the sidelines of an event by the PHD Chamber of Commerce and Industry, when Garg was asked by reporters if the government would seek an interim dividend from the RBI, he replied, “Yes”.
For the July 2017-June 2018 period, the RBI paid the government Rs 500 billion as dividend, of which Rs 100 billion was transferred on March 27, a few days before the financial year 2017-18 ended, thus helping reduce the fiscal deficit. The RBI follows the July-June calendar.
The government and the RBI have been locked in a tussle over various issues, including transfer of excess reserves of the central bank.
On Tuesday, Jaitley had said the government did not need any extra funds from the RBI to meet the fiscal deficit target. “It could be used for recapitalising public sector banks, it could be used for the poor of the country. The government does not use it for its own salaries. My government has the best fiscal record. Even this year, we will maintain the fiscal deficit and I don’t need that kind of money for maintaining the fiscal deficit,” he had said.
The fiscal deficit target for 2018-19 is Rs 6.24 trillion, or 3.3 per cent of gross domestic product (GDP). For the April-October period, the fiscal deficit already crossed that budgeted estimate and stood at Rs 6.49 trillion, primarily on the back of lower tax revenue and higher capital expenditure. On the expert committee on the Economic Capital Framework, Garg said, “Hopefully soon, it will be announced.”
The panel is expected to decide on how the central bank should provision for its capital reserves and whether it should transfer some portion to the government. It was decided by the RBI board in its November 19 board meeting, Urjit Patel’s last as governor, that this panel should be set up to reach a consensus on the contentious issue.
According to its internal calculations, the Department of Economic Affairs feels that the RBI is extremely conservative in its assessment of its capital buffers to meet market risks.
The RBI calculates its capital needs based on 'stressed value-at-risk' valuations, while the government wants the central bank to use just 'value-at-risk', which most other central banks use.
Asked whether the government would make additional capital infusion in PSBs, Garg said, “Yes...wait for supplementary demand for grants expected tomorrow.” The additional capital infusion is expected to come in form of bank recapitalisation bonds. These are considered ‘below the line’ items for balance sheet purposes and hence will not require any additional cash outgo.
So far in 2019-18, the government has infused Rs 229 billion in seven state-owned banks, mostly through recapitalisation bonds. The bank recapitalisation target for this fiscal year, as announced in the budget, is Rs 650 billion, all through bonds. Any amount included in the demand for grants is expected to be over and above the budgeted estimate.