A portion of the unprecedented dividend payout from the Reserve Bank of India (RBI) will be utilized to improve the fiscal deficit target for FY25 from 5.14% of gross domestic product (GDP) to around 4.9-5%, a person aware of the matter said.
Though a decision on the deployment of the additional payout is yet to be taken, a part of it is likely to be utilized to reduce the fiscal deficit, the person said requesting anonymity.
In absolute terms, the fiscal deficit for FY25 is estimated at ₹16.85 trillion in the interim budget presented in February.
The Centre narrowed its fiscal deficit target for FY24 to 5.8%of GDP in the Revised Estimates (RE), lower than the budgeted fiscal deficit estimate of 5.9%, on the back of robust tax collection and higher dividend payouts.
On Wednesday, the RBI approved a dividend of ₹2.11 trillion for the Central government for FY24 – a massive 141% higher than in FY23.
To be sure, the fiscal deficit as a share of GDP would also depend on the economic growth rate and the inflation trend, in addition to adjustments to spending and changes in receipts.
The latest dividend payout from the RBI will be instrumental in compensating for any slippages in tax revenue or increased public spending in FY25, and ensure fiscal deficit reduction is in sync with the committed glide path of 4.5% by FY26, experts said.
Also Read: RBI's record dividend of ₹2.11 trillion to help Centre's FY25 fiscal deficit, lower bond yields
"The Centre is pursuing an aggressive fiscal deficit target at 5.1% of GDP in FY25. High tax buoyancy is seen as a major enabler to attain this goal. However, slippages cannot be ruled out, particularly in GST," said Debopam Chaudhuri, chief economist at Piramal Enterprises Ltd.
"Factors like inflation, high interest rates and better compliance also contributed to collections. As inflation and interest rates decline in FY25, GST collections may witness a scale-down. The dividend windfall can come in handy and complement sagging tax revenues," he added.
Both direct and indirect taxes reported buoyancy in FY24.
Direct tax revenue reported a 17.7% growth in FY24 after adjusting for refunds. Indirect tax collection exceeded the revised estimates of ₹14.84 trillion. Gross GST mop up for the financial year stood at ₹20.18 trillion, exceeding the previous year's collection by 11.7%, CBIC chairman Sanjay Kumar Agarwal recently said.
Excise duty receipts came down from ₹3.39 trillion for FY24 to ₹3.04 trillion in the revised estimates for the fiscal.
For FY25, the budget estimates for excise duty receipts stand at ₹3.19 trillion. Lower global oil prices could reduce the government’s windfall tax collection on crude oil and the export of petroleum products, which is accounted for in the overall excise duty collection.
Another factor is the Centre's divestment target. Having missed it for the past few years, the Centre set an ambitious divestment target of ₹50,000 crore for FY25, about 67% higher than the revised target for FY24.
"The record high dividend has given reasonable degrees of freedom to the government to manage their finances. While fiscal consolidation has become easier, we need to remain cautious about the likely shortfall from the divestment and telecom proceeds," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
"Further, some pickup in expenditure growth in selected sectors may offset these gains. However, given fewer months to spend this year after the elections, the scope for a major surge in expenditure growth is limited. This we do not rule out the possibility of some borrowing cuts in the upcoming Budget," Bhardwaj added.
The interim budget presented on 1 February pegged a capex of ₹11.1 trillion for FY25, compared with FY24's budgeted estimates of Rs10 trillion and revised estimates of ₹9.5 trillion.
The higher capex was largely proposed for infrastructure sectors such as roads, shipping and railways. The capital allocation for these ministries has also been scaled up substantially in the budget, allowing them to complete work under the Vision 2027 plan.
"The Interim Budget for FY25 had provided for growth in the Centre’s capital spending of 16.9%, which was lower than the corresponding FY24 RE growth at 28.4%. In the forthcoming full-year final FY25 Budget, the government is likely to signal its commitment to lay a solid foundation for medium-term growth through continued infrastructure expansion," said D.K. Srivastava, chief policy advisor at EY India.
"These additional revenues are likely to be used first in further increasing the rate of capital expenditure growth. Some fraction of it may be used also for reducing the fiscal deficit to GDP ratio from 5.1% to close to 5% to signal a continued commitment to fiscal consolidation," he said.
The likelihood of increasing the Centre’s revenue expenditure growth seems to be limited during FY25 with the government determined to reduce subsidies and other related revenue expenditure components.
"The union government may consider announcing a clear medium-term growth target along with a fiscal consolidation roadmap. The pressure on increasing subsidies and revenue expenditures would be minimal post-election results," Srivastava added.
Meanwhile, the finance ministry is working on different scenarios, after the higher-than-anticipated RBI dividend payout, which can be presented before the new government on 4 June, a person aware of the matter said.
A call will then be taken to either revise the internal budget numbers or assign additional funds to balance the budget amid geopolitical and other uncertainties.
The finance ministry spokesperson didn't respond to an emailed query. T.V. Somanathan, the finance secretary and Ajay Seth, Secretary of the Department of Economic Affairs didn't respond to emailed queries.
When contacted, the government's chief economic adviser V.Anantha Nageswaran didn't offer comments.
