Simply put, larger dividends will help create more fiscal space for the government and naturally reduce the need for borrowing.

But India’s borrowings have been rising.

Rising Debt-To-GDP Ratio

Recently, Anand Ranganathan, author and political analyst, noted that India’s rising debt-to-GDP ratio is worrisome. “India’s public debt is not some ₹270 lakh crore irrelevant figure; the Centre alone owes about ₹201 lakh crore. Add the states and general-government debt is over 80% of GDP, far above the old FRBM ceilings of 40% (Centre) and 60% (Centre plus states) that were supposed to be hit by FY25,” he wrote on X.

The direct and immediate impact of borrowings is interest payments, for which the exchequer has to bear the brunt – current for past borrowings and the future for accumulated and fresh borrowings. The cycle is so vicious that the government is forced to borrow more to service the past debt.

According to the Reserve Bank analysis, the combined interest payments of the Centre and states rose from about ₹10.61 lakh crore in 2020-21 to ₹12.27 lakh crore in 2021-22 and ₹14.03 lakh crore in 2022-23. It was around ₹15.89 lakh crore in 2023-24. It would have gone up even further in subsequent years.

At the Union government level, interest payments remain one of the largest expenditure items. The 2026-27 Budget provided ₹14.04 lakh crore for interest payments, equivalent to about 26% of total expenditure and 40% of revenue receipts.

According to the Economic Survey 2026, the interest outgoings jumped from ₹8.05 lakh crore in FY22 to ₹12.76 lakh crore in FY2026.

RBI Surplus Transfer

Over the years, dividends from the RBI, referred to as surplus transfers in technical parlance, have become a major source of non-tax revenue for the government. From a modest payout, surplus transfers have reached record-breaking levels in recent years, raising questions about the government's fiscal dependence and the Reserve Bank’s independence.

As the payout from RBI depends on its earnings and balance sheet strength, it is technically an uncertain source of budgetary support. Also, the debt servicing and hedging expenses arising from the bumper flow of NRI funds from the recent Foreign Currency Non-Resident [FCNR(B)] swap window will cast a shadow on RBI’s earnings and surplus transfers to the government in the years to come.

The SBI research Ecowrap initially projected the hedging cost at US$ 10 billion on an estimated collection of US$ 85 billion through the FCNR(B) swap window. As the swap window has garnered about US$ 137 billion, the hedging as well as debt repayment will go up, thereby increasing RBI expenses and simultaneously reducing the surplus that can be transferred to the government.

Over the last five financial years, the RBI payout rose sharply from ₹30,307 crore in FY22 to a record ₹2,68,590 crore in FY25. The RBI’s annual accounts show that the transfers rose further to ₹2,86,588 crore in FY26. The cost of servicing FCNR(B) funds will cast a shadow on payouts.

The flow of surplus transfers from RBI to the government increased after the implementation of the Bimal Jalan Committee's recommendations.

A Rule-Based Framework

The Jalan Committee, which reviewed the RBI’s Economic Capital Framework (ECF), sought to establish a rule-based framework for determining how much capital the central bank should retain against financial and other risks and how much should be transferred to the government.
The RBI adopted the report in August 2019.

The surplus transfer from the RBI to the government is not a conventional corporate dividend. It is generated after meeting the central bank’s expenditure and risk-provisioning requirements. Excessive reliance on unusually large transfers could make government revenues more dependent on volatile central bank earnings.

Sources said that the scale and frequency of increasing payouts could blur the line between monetary authority and fiscal agent. Persistent pressure to maximise transfers can subtly influence buffer settings and risk tolerance, potentially compromising the primacy of price and financial stability.

PSU Dividend: Fiscal Gain v/s Corporate Health

The other important source of non-tax income for the government is dividend payments by public sector banks (PSBs) and central public sector enterprises (CPSEs). Normal dividend payments do not create a problem. However, a sharp rise in payouts raises questions as it may weaken the financial health of the state-owned entities.

According to a Finance Ministry guideline, “…every CPSE would pay minimum annual dividend of 30% of PAT (profit after tax) or 40% of the net worth, whichever is higher, subject to the limit, if any, under any extant legal provision. Financial sector CPSEs such as non-banking financial companies (NBFCs) may pay a minimum annual dividend of 30% of PAT subject to the limit, if any, under any extant legal provisions.”

The dividend received from public sector enterprises and other investments, according to the budget documents, increased from ₹59,952 crore in 2022-23 to ₹71,000 crore in 2025-26.

The government is also receiving increasingly substantial dividends from public sector banks (PSBs).

According to the Department of Financial Services, “PSBs declared dividend of ₹34,990 crore to shareholders (GoI share ₹22,699 crore) in FY 2024-25 against total dividend of ₹27,830 crore to shareholders (GoI share ₹18,013 crore) in FY 2023-24.”

The Trade-Off

The fiscal attraction for the government is obvious. Dividends provide the Centre with non-tax revenue without increasing taxes or borrowing. But there is a trade-off. Every rupee distributed as dividend is a rupee not retained for capital expenditure, expansion, debt reduction or strengthening the balance sheet.

A former bureaucrat who is now serving on several boards noted that larger dividend payouts could hinder growth and expansion for the companies.

“The PSUs need money to grow their own businesses at a time when competition is becoming fierce. A large sum of money needs to be ploughed back for making the organization AI-ready and globally competitive. A blind folded approach of increasing a larger share of dividend transfer may prove to be detrimental in the long run,” the former bureaucrat opined.

This is particularly relevant for capital-intensive companies such as power, petroleum, mining and infrastructure firms. Large payouts can reduce internally generated funds and potentially increase dependence on borrowing for fresh investment.

The issue, therefore, is not whether PSUs should pay dividends, but whether payouts are being determined by sustainable profitability and investment requirements—or primarily by the government's annual revenue needs.

As the non-tax revenue from these sources comes with a high economic cost, the government needs to rethink when it formulates the proposals for the 2027-28 Budget.  

India needs global-size banks and larger public sector undertakings with adequate financial muscle and a big war chest to help the country achieve the goal of a Viksit Bharat by 2047.