See high govt reliance on RBI surplus FY26 to narrow fisc deficit
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This story was originally published at 14:23 IST on 13 January 2025
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NEW DELHI – The Indian government may have to rely on the Reserve Bank of India's surplus transfer again in 2025-26 (Apr-Mar) to narrow its fiscal deficit further, Standard Chartered Bank said in a report. The bank expects the government to set a fiscal deficit target of 4.5% of GDP in the Union Budget for FY26, which Finance Minister Nirmala Sitharaman will present on Feb. 1.
The government has set a fiscal deficit target of 4.9% of GDP for FY25, and Standard Chartered expects the Centre to lower the target to 4.8% this year. "Reliance on RBI dividends is likely to remain high in FY26 to achieve fiscal consolidation. Central government fiscal consolidation – from 9.2% of GDP in FY21 to a likely 4.8% of GDP in FY25 – has been driven by improved tax collection, a reduction in unproductive expenditure, and high dividend flows from the RBI," the report said.
According to the report, reliance on RBI surplus transfers has usually been between 0.1% and 0.4% of GDP, which increased significantly to 0.65% of GDP in FY25. The central bank transferred a record high surplus of INR 2.11 trillion to the government in May. This reliance is likely to remain high at 0.50-0.55% of GDP in FY26 as well, according to the report.
"We think another year of elevated RBI dividends is possible, given large USD sales by the RBI; Apr-Oct gross USD sales by the RBI stood at $144 billion, and we think RBI could gross sell another $100 billion amid increased FX market volatility," the report said.
Standard Chartered also said that the government could see a surplus of INR 200 billion to INR 500 billion in FY26 from goods and services tax cess collection, which could "become sizeable in FY27".
"We think bonds issued to compensate states for the GST revenue shortfall could be fully redeemed by the end of FY26," the report said. The surplus from GST cess collection could be shared equally between the Centre and states. "The full annual GST cess collection of INR 1.5 trillion-INR 1.6 trillion (0.4% of GDP to be split between the Centre and states) will be available for fiscal management from the FY26 budget." End
US$1 = INR 86.51
Reported by Shubham Rana
Edited by Avishek Dutta
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