RBI dividend can help India lower fiscal deficit, get ‘rating support’ , says S&P Global Rating analyst

The unprecedented Rs 2.11 lakh crore dividend that the Reserve Bank of India handed over to the Centre could deliver another unexpected bonanza – rating support – if it is used for bringing down the fiscal deficit, an S&P Global Rating analyst said on May 23. Sovereign ratings considered by investors as a barometer of the nation’s creditworthiness and it significantly impacts borrowing costs by the government.

The central bank caught everyone by surprise when it took the decision to pay Rs 2.11 lakh crore as dividend for FY24, an amount nearly 107% more than the budgeted projection of Rs 1.02 lakh crore.

“The additional dividends from the RBI are around 0.35 per cent of GDP. Whether it would support the narrowing of the fiscal deficit in fiscal 2024-25 would really depend on the final budget that would be passed after the June election results,” S&P Global Ratings Analyst YeeFarn Phua told PTI from Singapore. “If it does lead to a full decrease of the deficit, we believe it will lead to a faster path of fiscal consolidation that, in turn, will provide rating support over time,” the S&P analyst added.

“The higher-than-expected dividend gives a fiscal cushion of 35-40 basis points as a ratio to gross domestic product. This would cover any potential revenue losses such as disinvestment, or more importantly, create room for additional spending,” said Vivek Kumar, an economist at QuantEco Research told the media on May 22.

The interim budget presented in the Parliament on February 1 projected a fiscal deficit of 5.1 per cent of the GDP for FY25. Fiscal deficit stood at 5.8% in FY24.
The government plans to bring it down to 4.5% by FY26. Fiscal deficit is the difference between government expenditure and revenue and also equals the amount of debt the government plans to raise in a particular financial year.

However, it remains to be seen how much of the money is utilised to decreasing the fiscal deficit since there exists other challenges for the government such as potential revenue shortfalls in areas such as divestment receipts or additional allocation to different expenditures in the final budget.