India's new government will be spoilt for choice with $25 billion extra in kitty

By Swati Bhat and Aftab Ahmed

MUMBAI/NEW DELHI (Reuters) - India's incoming government will be greeted with a $25 billion cheque from the central bank, giving it the option to either boost spending or narrow the fiscal deficit quicker, both of which will be cheered by investors.

On Wednesday, the Reserve Bank of India (RBI) announced a record 2.11 trillion rupees dividend transfer to the government, more than double New Delhi's and street estimates, leading to a decline in bond yields and a rise in equity markets.

The surplus fund can help the new government, which will take charge after the current elections, bring down its fiscal deficit by 0.3% of gross domestic product (GDP) or increase spending on infrastructure or "populist" stimulus, Citi Research's Samiran Chakraborty said.

"The bond markets would likely hope that the government follows the deficit reduction route, while the equity markets would likely prefer the government taking the expenditure increase one," said Chakraborty.

During the election campaigns, the opposition Congress promised annual cash handouts of 100,000 rupees ($1,202.07) to poor women and unemployed youth. The party's star campaigner Rahul Gandhi also promised debt waiver for farmers.

But Prime Minister Narendra Modi of the Bharatiya Janata Party (BJP) has avoided promising any new major welfare measures.

"Despite higher revenue from the RBI dividend, we doubt the government would opt for more populist expenditure in its budget, if the government is BJP-led," said Shreya Sodhani, an economist at Barclays.

"The current government has not shown a disposition towards populist spending even in an election year."

The BJP-led government resisted the temptation of spending trillions of rupees on schemes for the poor in its last budget before the election while raising spending on infrastructure to 11.11 trillion rupees, more than three time the sum spent in 2019.

QUICKER FISCAL CONSOLIDATION

The new government will likely present the final budget in July, leaving the administration with only eight months to spend funds allocated to them.

Government spending has been slow so far in the year, with the start of elections from April. Tax collections, meanwhile, have been strong due to buoyancy in the economy.

India collected a record 2.10 trillion rupees in goods and services taxes in April, the first month of the financial year, ensuring the government is on track to meet its planned fiscal goal of 5.1% of GDP this year.

This could mean the government will lean towards using the bumper dividend for fiscal consolidation.

There is scope for a slight reduction in the targeted fiscal deficit for the current year, said Ashima Goyal, a professor and an external member of the country's monetary policy committee, who expects the government to comfortably achieve the targeted fiscal deficit of 4.5% by 2025/26.

India's fiscal deficit ballooned to 9.2% during the pandemic but the government has steadily brought this down.

But bringing down the deficit by 130 basis points from 5.8% in 2023/24 was seen as challenging and dependent on one-off revenue from either privatisation or auction of telecom spectrum.

($1 = 83.1900 Indian rupees)

(Reporting by Aftab Ahmed and Swati Bhat; Editing by Subhranshu Sahu)