Fiscal bonanza

RBI transfer should be used for fiscal consolidation

The Reserve Bank of India (RBI) on Wednesday announced its board had determined how much surplus it would transfer to the Government of India. The sum, Rs 2.11 trillion, came as a surprise. In the interim Budget 2024-25, presented by the Union finance minister earlier this year, the amount expected was merely Rs 1.02 trillion. Thus, there is a Rs 1.09 trillion windfall for the government this fiscal year. This is in spite of the board raising the contingency risk buffer to 6.5 per cent of the RBI’s balance sheet, the highest level recommended under guidelines announced a few years ago. Such a high transfer appears safe on the surface. At the moment there are no real concerns about macroeconomic stability in India.

The additional dividend will certainly make life a little easier for the next government. When the full Budget is presented in July, it is to be hoped that the Ministry of Finance uses this opportunity to speed up its fiscal consolidation process. The effects of the pandemic are still visible in the government’s finances. Before it hit, the fiscal deficit was in any case too high for “normal” times, at 4.6 per cent of gross domestic product (GDP). In the pandemic year, thanks to a constriction of GDP and some extraordinary measures, it went up to over 9 per cent of GDP. The budget estimate for 2024-25 is still over 5 per cent, however. It might be sensible to use this transfer — which may amount to 0.3 per cent of GDP — to bring estimates down below 5 per cent. Gross market borrowing in the ongoing financial year was pegged at Rs 14.13 trillion and net market borrowing at Rs 11.75 trillion. A reduction in this figure would aid in debt management and a correction in the yield of government securities would be welcome.

However, the larger question of fiscal sustainability must be addressed. The government cannot constantly depend upon transfers from the central bank or dividend from public-sector enterprises. Proper fiscal management requires that the government increase the tax-to-GDP ratio. This might come from streamlining goods and services tax (GST). The next government must immediately initiate work on rationalising the rates and slabs of GST in the GST Council. The GST system has underperformed because of premature rate reduction and a multiplicity of slabs. The idea of direct-tax reform must also be revived. It is unfortunate that the plans for a direct-tax code have made little progress. On the expenditure side, the government has pushed capital expenditure through higher borrowing. However, there are limits to the extent this can be sustained, given India’s high general government budget deficit and public debt. A more appropriate way to address this would be through disinvestment in the public sector. Wholesale privatisation should make a comeback, now that Air India has been successfully sold. In the next five years, the government would do well to focus on disinvestment. The immediate effect of the RBI transfer will be to simplify the fiscal maths for the Ministry of Finance. But the longer-term priorities stay the same.