The current year fiscal deficit had been originally projected at 6.4% of GDP in the Union Budget, but that is likely to be revised upwards closer to 7% of GDP to factor in the higher cost of fighting inflation.
For FY22, the fiscal deficit was originally estimated at 6.9% of GDP and revised to 6.8% on the back of higher GDP estimates. The month of May 2022 saw the much-awaited LIC IPO raising Rs20,900 crore for the Indian government. However, the proposal to sell 52.98% stake in BPCL has been put off and to that extent the fiscal gap is likely to remain.
To boost its revenues, the government is already taking other measures in the current year including the recent levy of higher export duties on oil, enhanced import duties on gold etc. These are likely to provide a boost to revenues in a year when the capital markets are likely to remained under pressure and hence the divestment revenues could be subdued.
Fiscal deficit trajectory for Apr-May FY23
The Controller General of Accounts (CGA) publishes the fiscal deficit data with a lag of 1 month i.e. data up to May 2022 has been published on the last day of June 2022. For the first 2 months of FY23 ending May 2022, the fiscal deficit in absolute terms stood at Rs2,03,921 crore. The absolute fiscal deficit at Rs2,03,921 crore is 12.3% of the budget estimates of fiscal deficit for FY23 at Rs16,61,196 crore.
The government has already hinted that the actual fiscal deficit for the current year could be higher by about 60 to 70 basis points due to the aggressive fight against inflation. Typically, the fight against inflation (especially cost push inflation that India is seeing now) requires the government to cut the import duties on key raw materials so that cost push inflation can be contained. However, this also means that government has to sacrifice revenues.
For FY23, the budget estimate of fiscal deficit is Rs16,61,196cr, which is 6.4% of GDP for the year as per Budget-22. At the current run rate; for the remaining 10 month the government has a fiscal deficit leeway to the tune of Rs14,57,275 crore. However, in case the battle against inflation gets sharper, then these limits are likely to get used up pretty fast. Remember, the fiscal deficit utilization has already moved up from 4.5% at the end of April 2022 to 12.3% by the end of May 2022.
Revenue and expenditure saga for April-May FY23
Total receipts up to May 2022 were to the tune of Rs3.82 trillion, which is already 16.7% of the full year estimated receipts and on track. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections. GST collections have been inching towards the Rs150,000 crore per month over the last few months. Despite headwinds in terms of global macros, the revenue flows are largely at par with expectations.
The FY23 total receipts of Rs3.82 trillion comprised of Rs3.08 trillion by way of taxes and Rs0.75 trillion by way of non-tax revenues. This was largely accounted for by Rs0.50 trillion by way of dividends and profits and another Rs0.25 trillion by way of disinvestment of PSUs, principally the 2.5% stake in LIC. Unlike in the previous year, the contribution of RBI dividend to the government is almost negligible this year.
For the period ended May 2022, the total expenditure (revenue plus capital spending) stood at Rs5.86 trillion or 14.8% of the full year expenditure target for financial year FY23 pegged at Rs39.45 trillion. The total spending of Rs5.86 trillion includes Rs4.79 trillion of revenues expenditure and Rs1.07 trillion of capital expenditure. The biggest components of revenue spending in the first 2 months of FY23 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays were in the area of defence.
Tracking the fiscal deficit for April â€“ May FY23
Here are some key points pertaining to the build-up of fiscal deficit for FY23, to date.
The net tax revenues of Rs3.08 trillion included gross tax collections of Rs4.04 trillion of which Rs0.96 trillion represents devolution of taxes to states and union territories.
The non-tax revenues have been dominated by the dividend and interest receipts as well as the inflows from the divestment of LIC stake
The budgeted interest payment for the full year is Rs9.41 trillion of which Rs1.05 trillion was paid till the end of May 2022, which is 11.2% of full year target.
Revenue deficit up to May 2022 stood at 12.3% of full year budget. Revenue deficit as a share of fiscal deficit has been steady at around 59.75% as of end May 2022
The primary deficit till May 2022 was 13.7% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.
In the first two months of FY23, the revenues have been on target and it would eventually boil down to handling the expenditure side, especially in the right of rising inflation.
Fiscal discipline must still be the driving force
The government started FY23 with a promise to keep fiscal deficit reined in at 6.4% of GDP. However, high inflation meant that the government would once again have to provide the much needed anti-dote. That is what it did by cutting the rates of import duties on a number of key inputs and agricultural items so that the cost push inflation could be reined in. However, that also meant sacrificing revenues and the government has already hinted that fiscal deficit may slip back to 6.9%, a slippage of 50 bps. Most likely, if the cost push inflation persists, then fiscal deficit may end up above 7% for FY23.
That brings us back to the million dollar question of fiscal discipline. The government has already hinted at fiscal looseness till 2026. That would be brash and ambitious. For an emerging market economy, India has one of the highest levels of fiscal deficit as a percentage of GDP. The target of 3.5% may be a far cry, but the government must use buoyant revenues to get more aggressive on reducing fiscal deficit. Investors are likely to be very impressed if the government targets 3.5% by 2026 with a clear plan. It will make the FPIs and the rating agencies happier and the Indian economy sounder.