Policy Watch: From RBI Payouts To Trade Talks With EU

RBI Set To Provide Higher-Than-Expected Dividend To The Centre

The Reserve Bank of India (RBI) is expected to announce an even larger sum of dividend to the government this year. Sources said that the amount could be anywhere between Rs 2.5 lakh crore and Rs 3 lakh crore. Last year, the RBI had transferred Rs 2.1 lakh crore.

In the Union Budget, the government pegged the dividend amount at Rs 2.56 lakh crore. 

According to sources, the amount could exceed Budget expectations, giving the Centre much-needed room to increase its expenditure, while focusing on economic growth. It could also take care of any extra spending that occurs on Defence accounts.

This higher-than-expected non-tax revenue will also boost investors' confidence and cushion the government’s coffers, especially amid the rise in global geo-economic tensions, slowing growth rate and now, the emerging war-like situation with Pakistan.

The RBI dividend amount is key to supporting social sectors and maintaining their stability. In 2020-21, RBI had transferred a dividend of Rs 57,128 crore.

The RBI’s income has largely been driven by its foreign exchange operations. The central bank has been regularly selling dollars to support the Indian Rupee and prevent it from dropping sharply against the US Dollar.

The government has set a fiscal deficit target of 4.4 per cent for the current financial year, compared to 4.8 per cent in the previous fiscal.

Finance Minister Nirmala Sitharaman has underlined that the government will take all measures to ensure that the fiscal deficit as a percentage of the GDP is on a declining path.

More Trade Talks In The Offing: This Time With EU

While the India-Pakistan hostilities drag on, India-EU officials are likely to meet next Monday to discuss finalising a long-drawn-out trade deal between the two.

Earlier in February, Prime Minister Narendra Modi and European Commission President Ursula von der Leyen had announced a commitment to conclude an FTA by end-2025. This marked the first time a specific deadline was set for the long-pending negotiations, which have spanned nearly two decades. Von der Leyen described the potential deal as “the largest of its kind anywhere in the world”, emphasising its strategic and economic significance.

The push to resolve the trade deal — which has been held up over insistence for more concessions from both sides — has become vital to the EU and India, in light of the trade war that the US has kicked off earlier this year. The European Union is the second-largest destination for Indian exports, and the third-largest exporter to India after China and Russia. 

Both India and the EU also want to use the FTA to reduce reliance on Chinese markets and supply chains, making the trade pact a strategic tool for increasing mutual economic dependence.

Another problem area is the threat by the EU to slap carbon taxes on imports, which are fossil fuel-intensive. Indian politicians have threatened retaliatory steps if Indian products are “unfairly taxed”. 

However, experts expect these to be papered out or at least put on the back burner as both sides need this deal. “Imposition of retaliatory tariffs may not be in the best interests of India since the government is looking for an early conclusion of the long-awaited bilateral free trade agreement with the EU,” said Professor Biswajit Dhar, formerly the director general of RIS and a trade policy expert.

Coal Supply Policy Relaxed For Power Push

India has revised the policy for coal allocation to the power sector, introducing “innovative features” to the existing SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) policy. 

On Wednesday, the Cabinet Committee on Economic Affairs (CCEA) approved new reforms that aim to support the power sector with more flexibility, wider eligibility and better access to coal. 

The new policy will simplify coal allocation and boost power generation. It introduces two streamlined windows: One offering coal at notified prices to central and state power plants, another allowing all power producers, including those using imported coal, to secure coal through auctions for periods ranging from 12 months to 25 years by paying a premium above the notified price. 

This relaxes the prerequisite of power purchase agreements (PPAs) that were earlier needed by coal-based power producers to sell electricity. 

With this policy, India aims to encourage more power plants to be set up near coal mines. This would reduce the logistical challenge of transporting coal to far-off locations that often house power plants. 

The SHAKTI policy, launched in 2017, replaced the old nomination-based regime with a transparent auction or tariff-based bidding process for coal linkage allocation. The move fits with the government's broader plan to meet the growing electricity demand driven by rapid economic growth. 

The revision came the same day as the much-awaited draft of the national climate finance taxonomy, which intends to direct investments to eco-friendly endeavours. 

While “climate-friendly” and “coal power production” may seem mutually exclusive as policy pushes, for a developing economy, they need not be completely antithetical. Both intend to be consistent with the plan for Viksit Bharat by 2047.