Finmin seeks interim payment from RBI to contain fiscal deficit

Mumbai: The finance ministry is negotiating with the Reserve Bank of India (RBI) for an interim payment or transfer of surplus of the Indian central bank’s income ahead of the end of its accounting year in an attempt to bridge the country’s fiscal deficit and stick to the estimated deficit target of 4.8% of gross domestic product (GDP) for fiscal year 2014 that ends in March.

Finance minister P. Chidambaram will present the vote-on-account on 17 February and seek Parliament’s approval for expenditure beyond the current fiscal till the new government is in place after the general election.

RBI follows a July-June accounting year and typically transfers the surplus in August after its board meeting that passes its annual accounts. Last year, the Indian central bank transferred ₹ 33,100 crore to the government; the year before, it did ₹ 16,100 crore.

The ministry does not want to wait till August as it wants to use the money to contain the current year’s fiscal deficit. RBI, people familiar with the development said, has been discussing this with internal experts but may not be able to oblige the government as the RBI Act does not have a provision for transferring surplus before the accounting year ends.

A major source of RBI’s income comes from the deployment of its foreign currency assets overseas. In the domestic market, it earns money from the sale of securities, conduct of repo and reverse repo auctions or the so-called liquidity adjustment facility for banks, offering funds to banks under its marginal standing facility, and the government’s cash management operations through so-called ways and means advances.

Apart from interest payment and establishment costs, the central bank sets aside money from its income for the contingency and asset development reserves to take care of unforeseen developments. The surplus is transferred to the government.

Typically, the government persuades public sector banks in which it owns the majority stake and other state-owned firms to issue an interim dividend to help it contain the fiscal deficit but never in the past has it asked for an interim payment from the central bank.

Since January, state-run banks and firms have announced interim dividend payments of ₹ 27,473.38 crore. Coal India Ltd paid the most, ₹ 18,317.46 crore, followed by NTPC Ltd, ₹ 3,298.17.

The fiscal deficit in the first three quarters till December inched closer to the budgeted target for the whole year even as the government faced a shortfall in tax collections and revenue receipts from the sale of government shares in state-run companies. In April-December, the fiscal deficit reached ₹ 5.16 trillion, or 95.2% of the full-year target, compared with 78.8% a year ago.

Still, Chidambaram is confident of keeping fiscal deficit within the budget target of 4.8% of GDP. “Have no doubt in your mind,” he said last week, “the fiscal deficit will be contained at 4.8% or below (of the GDP in 2013-14).”

While affirming its lowest investment grade rating for India in September with a negative outlook, credit rating agency Standard and Poor’s said achieving the government’s fiscal deficit target of 4.8% of GDP in fiscal 2014 will depend “partly on the government’s resolve on the level of election spending and on the evolution of commodity prices”.

Analysts said Chidambaram would be able to meet the fiscal deficit target primarily through compression of expenditure. He had met the fiscal deficit target of 5.2% of GDP in 2012-13 through a massive 18% cut in capital expenditure. Ministries and departments have spent only 63.3% of the total Plan expenditure of ₹ 5.55 trillion in the first three quarters of 2013-14, as per the latest official data.

A senior RBI official, who did not want to be identified, said the government may not need any support from the central bank as it will get money from the spectrum auction but declined to discuss anything about the negotiations between the finance ministry and central bank on an interim transfer of surplus.

Telecom companies have put in bids worth ₹ 58,600 crore in the ongoing spectrum auction. The government will now get at least ₹ 17,362.66 crore in the current fiscal from the auction.

The bidders can pay the part of the money upfront and the remaining amount in yearly instalments.