GOVT MAY BEAR R26,000-CR FALL IN DIVIDEND FROM RBI
Blame it equally on seigniorage and liquidity sucking, while RBI's dwindling foreign assets value is the third culprit, say economists
The government’s estimated dividend income from the Reserve Bank of India in the current financial year is
likely to be set off by ~26,000 crore on account of a fall in seigniorage — the profit made by the government from the difference between the face value of currency and its printing cost — as well as the RBI's reverse repo measures to suck excess liquidity after demonetisation, according to SBI Group Chief Economist Soumya Kanti Ghosh.
The Union Budget 2017-18 had projected receipts of ~75,000 crore from the RBI, public sector banks and financial institutions, against a little over ~76,000 crore in 2016-17. But the RBI said it would transfer ~30,659 crore as surplus to the government in the current financial year, much lower than last year’s ~65,876 crore.
The government’s estimated dividend income from the Reserve Bank of India in the current financial year is likely to be set off by ~26,000 crore on account of a fall in seigniorage — the profit made by the government from the difference between the face value of currency and its printing cost — as well as RBI's reverse repo measures to suck excess liquidity post demonetisation, according to SBI group chief economist Soumya Kanti Ghosh.
The Union Budget 2017-18 had projected receipts of ~75,000 crore from the RBI, public sector banks and financial institutions, against a little over ~76,000 crore in 2016-17. But the RBI said it would transfer ~30,659 crore as surplus to the government in the current financial year, much lower than last year’s ~65,876 crore. Public sector banks and financial institutions are expected to chip in ~10,000 crore.
This amounts to a gap of ~35,000 crore between what RBI was expected to transfer as dividend to the government and what it would actually do.
Ghosh says the demonetisation exercise has resulted in net loss of seigniorage to the RBI as the entire face value of ~15.44 lakh crore demonetised had to be printed. The total cost comes out to be in the range of ~12,600-13,000 crore. The number of incremental notes printed is taken at 5,200 crore, based on RBI indent estimates, the RBI circular and internal estimates of Ghosh' team.
The newly supplied currency was 84 per cent of the extinguished currency as on June 2017 in value term.
Additionally, the system has tuned to absorption mode to suck excess liquidity in the post-demonetisation period. By using the policy repo (fixed and variable) and reverse repo rate (fixed and variable), Ghosh estimates that a net of ~12,600 crore interest has been foregone by RBI to banks in the liquidity adjustment facility.
Thus, seigniorage loss and reverse repo contraction have taken off around ~26,000 crores from RBI dividend transfer this year, he says. The rest around ~9,000 crore could be due to loss of income from other sources, according to his estimates.
Devendra Pant of India Ratings says that stronger rupee against the dollar shrank the value of foreign assets that RBI had. RBI keeps its foreign assets mainly in US treasury bonds and gold.
Rupee appreciated by 4.7 per cent from average value of ~67.65 in November, 2016 to ~64.45 in July (last month of RBI's financial year).
But will the shortfall lead to widening of the Centre's fiscal deficit from the projected 3.2 per cent of the country's gross domestic product? "No," says Ghosh.
He says there is a possibility of incremental additional revenue of ~20,000 crore from direct taxes, because of increase in new direct tax payers by 2.2 million post-demonetisation. This means that there may be a modest shortfall in revenue target of around Rs 1,000-15,000 crores.
"We believe this amount is minimal and could be mobilised by the government during the year and hence the headline fiscal deficit number at 3.2% will be met," he says.
Direct tax receipts in the first four months of 2017-18 were 19.1 per cent higher as refunds declined even as the gross amount paid by companies reflected their struggle with the Goods and Services Tax.
The RBI is yet to count the amount that has come back to the system out of the over ~15 lakh crore in old ~500 and ~1,000 rupee notes that were in circulation.