India’s next government, buoyed by an unprecedented windfall of Rs 2.11 lakh crore from the Reserve Bank of India (RBI), faces a crucial decision that could shape the nation’s economic trajectory. This substantial dividend transfer provides a unique opportunity to either bolster fiscal consolidation or ramp up spending on infrastructure and social programmes. Each path offers distinct advantages and challenges, but the broader implications for India’s economic health must guide this decision. The RBI’s dividend, more than double the initial estimates, arrives at a pivotal moment.

India’s fiscal deficit has been a pressing concern, particularly after ballooning to 9.2 per cent during the pandemic. While the government has made commendable strides in reducing this to 5.8 per cent, the goal of reaching a 4.5 per cent deficit by 2025-26 remains ambitious. Utilising the RBI’s surplus for deficit reduction could accelerate this process, enhancing India’s fiscal stability and investor confidence. A lower fiscal deficit can lead to reduced borrowing costs and lower inflationary pressures, creating a more conducive environment for sustainable economic growth. However, the alternative of increased spending cannot be dismissed lightly. Investing in infrastructure has long-term benefits that can significantly boost economic productivity.

The BJP-led government’s track record of prioritising infrastructure, with its three-fold increase ~ to Rs 11.11 lakh crore ~ in spending on this sector since 2019, underscores the transformative potential of such investments. Enhanced infrastructure can drive economic growth, create jobs, and improve quality of life. Moreover, targeted social spending, especially in a country with significant income disparities, can stimulate immediate economic activity and uplift vulnerable sections of the population. Yet, there is a nuanced balance to strike. Excessive populist spending, while politically appealing, risks undermining fiscal discipline. The opposition Congress’s promises of substantial cash handouts and debt waivers for farmers could strain the fiscal deficit further, leading to long-term economic instability. In contrast, strategic investments in infrastructure and essential social services can offer a dual benefit: spurring economic growth while maintaining fiscal prudence.

The timing of this financial boon also coincides with robust tax collections, with a record Rs 2.10 lakh crore in goods and services taxes collected in April. This fiscal buoyancy provides a cushion, allowing the government some leeway in its spending decisions. However, the administration must avoid the temptation to indulge in short-term populism at the expense of long-term economic health. The upcoming budget will be a litmus test for the new government’s economic philosophy. Opting for fiscal consolidation will send a strong signal of fiscal responsibility, potentially lowering bond yields and attracting long-term investment. On the other hand, judiciously increased spending on infrastructure could catalyse growth, enhance India’s competitiveness, and address pressing social needs without jeopardising fiscal stability. Ultimately, the decision should not be seen as a binary choice but rather a strategic balancing act. The government can aim for a prudent mix of both approaches: directing a significant portion of the RBI’s dividend towards reducing the fiscal deficit while allocating a measured amount to high-impact infrastructure projects