Fitch Ratings: RBI’s ₹2 lakh crore dividend can aid India’s fiscal deficit goals

According to Fitch Ratings, India’s continued deficit reduction, particularly if supported by durable revenue-raising reforms, would be positive for India’s sovereign ratings fundamentals over the medium term. The sovereign rating fundamentals include five risk categories—domestic economic risk, public finance risk, external economic risk, financial stability risk, and environmental, social and governance.

The statement by Fitch Ratings came close on the heels of the RBI’s announcement of a larger-than-expected dividend payout of ₹2 lakh crores to the government.

This dividend would help India to tackle the fiscal deficit target of 5.1% of GDP for fiscal 2025 and lower the deficit beyond the current target, the rating agency said in a press statement.

The report mentioned that the new government would have two options to utilise the dividend. It could keep the current fiscal deficit target for FY25 and spend the amount to boost infrastructure spending. The dividend payout can also aid the government to offset any upside spending surprises or if the revenue falls short of the budgeted amount, such as from divestment.

“Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1% of GDP. The government’s choice could give greater clarity around its medium-term fiscal priorities,” Fitch Ratings said.

The government wants to lower the fiscal deficit to 4.5% by 2026. The good part is that the RBI dividend surpassed the budgeted amount of ₹1.02 lakh crores for the FY 2024-25 interim budget, including dividends from the RBI and other financial institutions.

“Transfers may also be influenced by the RBI’s views on what level of buffer is appropriate to maintain on its balance sheet.” said the Fitch Ratings report on the RBI’s dividend transfer to the government. “The potential volatility of transfers means there is significant uncertainty about their medium-term path, and we do not anticipate that dividends as a share of GDP will be sustained at such a high level.”

While the fiscal and GDP data are slated to be released on Friday, May 31, the new government that comes to power next month, post elections counting, will present the main budget in July. It is only in July it will become clear how the dividend will be utilised.