If the month of July was special in that there was a revenue and fiscal surplus, it is back to a deficit in August on both the fiscal and the revenue account. Indian economy had reported a fiscal surplus and a revenue surplus in July 2022 after a gap of almost 28 months. For instance, in the month of July 2022, the revenue account surplus was Rs42,509 crore while fiscal account surplus was Rs11,040 crore.
The above surplus could be largely attributed to the fact that the government had delayed payment of tax refunds. This magnified the fiscal and current account and showed a surplus in July 2022. However, bulk of the refunds have been paid out in August 2022 and in September so the net tax figure has not grown so aggressively. This resulted in a fiscal deficit of Rs200,770 crore in August 2022, while revenue deficit stood at Rs158,520 crore.
For the first 5 months of FY23 ending August 2022, the fiscal deficit stood at 32.6% of full year fiscal deficit target as compared to just 20.5% of full year Budgetary Estimates (BE) as of the close of July 2022. The current year fiscal deficit had been projected at 6.4% of GDP in the Union Budget. In between, the government had hinted at the fiscal deficit for FY23 spiking to 6.9% of GDP. However, now the finance ministry is confident of flat to lower fiscal deficit for FY23, which is evident from a Rs10,000 reduction in H2-FY23 borrowing target.
How has the fiscal deficit panned out in FY23 so far?
The Controller General of Accounts (CGA) publishes the fiscal deficit data with a lag of 1 month i.e. data up to August 2022 was published on the last working day of September 2022. For the first 5 months of FY23 (April to August 2022), the fiscal deficit in absolute terms stood at Rs541,601 crore. That translates into 32.6% of the budget estimates of fiscal deficit for FY23 at Rs16,61,196 crore.
There were fears that the government may have to revise the fiscal deficit higher from 6.4% to about 6.9% due to its aggressive fight against inflation. Fiscal policy to control inflation includes cuts in import duties to cut input costs. That is also revenue constricting and that was putting the fiscal position in jeopardy. However, there have been several positives since.
For starters, the direct tax collections have been extremely robust across personal income taxes and corporate taxes. Secondly, the indirect taxes led by GST flows have been above Rs1.40 trillion a month on a consistent basis. Further, the government has also taken up sharp expenditure cuts in the last few months without impeding the capex, that is the key to long term growth. This combination has given the government confidence of holding fiscal deficit at around 6.4%, which is also evident from Rs10,000 crore lower borrowings. At the current run rate; for the remaining 7 month the government has a fiscal deficit leeway of Rs11,19,595 crore.
How money came in and went out in FY23
Total receipts up to August 2022 were to the tune of Rs8.48 trillion, which is already 37.2% of the full year estimated receipts. However, the net revenues in August have taken a hit on account of the heavy refund pay-outs. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections. This has more than offset the lower flows from RBI transfers and from disinvestment of PSUs. Despite headwinds in terms of global hawkishness, supply chain constraints, recession fears and commodity inflation; revenue flows have been not only steady, but has also been buoyant.
The FY23 total receipts of Rs8.48 trillion comprised of Rs7.00 trillion by way of taxes and Rs1.48 trillion by way of non-tax revenues. Among the non-tax revenues the RBI dividend to the government for FY22 fell to 0.30 trillion from Rs0.99 trillion in FY21. The other major head was the flows from the disinvestment revenues, predominantly from the sale of 3% stake in LIC in May 2022. In fact, non-tax revenues are sharply lower on yoy basis.
For the 5 months ended August 2022, the total expenditure (revenue plus capital spending) stood at Rs13.90 trillion or 35.2% of the full year expenditure target for financial year FY23 pegged at Rs39.45 trillion. The total spending of Rs13.90 trillion includes Rs11.37 trillion of revenues expenditure and Rs2.53 trillion of capital expenditure. The biggest components of revenue spending in the first 5 months of FY23 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays were in defence.
How the various deficits showed up in FY23?
Here are some key takeaways from the build-up of the various deficits in FY23.
The net tax revenues of Rs7.00 trillion included gross tax collections of Rs10.21 trillion of which Rs3.21 trillion represents devolution of taxes to states and tax refunds.
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 Rs3.39 trillion was paid till the end of August 2022, which is 36.0% of full year target.
Revenue deficit up to August 2022 stood at 32.4% of full year budget. Revenue deficit as a share of fiscal deficit has spiked sharply to 59% as of August, from 46% last month.
The primary deficit till August 2022 was 28.2% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.
Irrespective of what eventually happens to the fiscal deficit by the end of FY23, the government decision to reduce the borrowing calendar for the second half of FY23 by Rs10,000 crore shows the confidence of the government that the situation would be largely under control. For now that looks very likely.
Government is being prudent about fiscal deficit: and that is good
In the February 2022 Union Budget, the government had impressed the markets with its decision to peg fiscal deficit at 6.4%. Despite the pressures of higher inflation and the cost of the battle to control inflation, the fiscal deficit target is not being violated. Government is now in a position to further trim the fiscal deficit to closer to 4% of GDP in the next couple of years, if the robust revenues continue on the direct and indirect tax front.
What is gratifying is that the government is using its inordinately buoyant tax revenues to aggressively contain fiscal deficit. That remains the best way to reverse FPI outflows and impress rating agencies. As a promising emerging market, India just cannot afford to ignore these opinion makers. Centre has given the first signal of its seriousness to contain fiscal deficit by reducing the borrowing target for H2-FY23. Despite the disruption caused by COVID and the Ukraine war, India seems to be on target on fiscal deficit front.