Fiscal Deficit at 45% of FY24 target after seven months

30 Nov 2023 , 09:02 PM

Fiscal deficit again grows at subdued clip in October 2023

The fiscal deficit data, along with the statement of government accounts for the first seven months of FY24 up to October 2023 is relatively interesting. While the fiscal deficit had shown a rapid increase in the months of June and July, the growth has tapered in August, September, and October 2023. Fiscal deficit as a percentage of full year target has just risen from 33.9% to 36% in August 2023; 36% to 39.3% in September 2023 and from 39.3% to 45% in October 2023. 

Even assuming some spillages in spending due to food and fuel subsidies, the fiscal deficit target of 5.9% of GDP for FY24 looks perfectly achievable. There are some risk factors, which cannot be overlooked. General elections are less than a year away and this is the time when the government undertakes a number of big spend projects. Government spending could rise. As of the close of November 2023, the CGA (Controller General of Accounts) has published the fiscal deficit data of October 2023 along with the cumulative data for the first seven months of fiscal FY24. 

Can the fiscal deficit target of 5.9% for FY24 be defended?

In FY23, the central fiscal deficit (CFD) had been pegged in the Union Budget 2022-23 at 6.4% of GDP. The actual fiscal deficit for FY23 was slightly lower at 6.32% of GDP; which is appreciable considering that the government had to overspend to contain inflation with supply side support. However, this was compensated by a surge in tax revenues. That encouraged the Finance Ministry to set a more ambitious target of 5.9% for FY24. However, this lower fiscal deficit target for FY24 is based on certain core assumptions. It assumes robust direct and indirect tax revenues and subsidies under control. 

Taxes are robust, although not as robust as last year. In last 2 years, the central government has spent more than budgeted on the capex side, even at the cost of revenue spending, so that the growth triggers are not impacted negatively. To an extent, that has boosted government revenues. Till now, the government has maintained its borrowing target at Rs6.55 trillion for the H2-FY24, which is a signal that full year fiscal deficit has no major surprises in store. While there are risks to the fiscal deficit number, it looks unlikely that it may really shoot beyond 5.9%. After all, the fiscal deficit has just scaled 45% of the full year deficit at the end of 7 months and it still has 55% of the fiscal deficit to spend in the remaining 5 months of FY24.

Some fiscal deficit risk factors in FY24

While numerically, the fiscal deficit numbers look gratifying, there are some clear risks that are emerging. Fiscal deficit, in any year, tends to be back-ended. That has been the experience in India in the last few years. Here are some risks to the assumption that defending the 5.9% fiscal deficit target should be a cakewalk. It may be achievable, but surely it is not going to be a cakewalk; and here is why.

• The revenues from taxes are still strong, but the robustness of FY23 is missing. In FY23, the robust direct and indirect taxes offset lower divestment revenues. Also, the higher capex was kept in check with controls over revenue spending. This year, we have seen capex spending going ahead of target and the disinvestment revenues once again promise to be a disappointment as far as the government coffers are concerned.

   

• The disinvestment revenues were sharply lower this year and with the IDBI Bank divestment and the BPCL divestment being put off for now, there are no big ticket sell-offs for the government in this fiscal. However, there are good tidings in the form of higher RBI dividends, but that has already been discussed. It is uncertain how much the revenues are going to get boosted by the rather ambitious asset monetization program.

   

• While domestic growth is still strong, the export driven global growth is faltering; in good and services. That is likely to have an impact on tax flows in this year and it is feared that things could tighter in the second half of FY24. That impact is already visible with the export driven sectors being the worst hit in the growth story.

   

• There could be some surprises in the subsidy bill this year. Fertilizer subsidies may be lower, but the extension of the free food program and oil subsidies could be a challenge. For now, oil is around $80/bbl, but it will depend on the outcome of the OPEC meet.

For the government, the second half could be a lot more testing, with the real impact of the election year being seen in the coming months.

How did government revenues pan out as of end October 2023

With data up to the end of October 2023 now available, we have an evolving picture of how the revenues are panning out in FY24 vis-à-vis the annual targets for FY24. Revenue flows in FY24 are seeing good traction. Here are some key data points.

• Against the full year total revenue target of Rs27.16 trillion, the central government has achieved Rs15.91 trillion of revenues as of the end of October 2023. That is, 58.6% of full year revenue target, which is lower than the comparable period in FY23.

   

• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the full year target for net tax revenues (net of refunds and devolvement) at Rs23.31 trillion, the government has achieved net tax revenues of Rs13.02 trillion as of the end of October 2023, showing 55.9% target achieved. This has improved sharply after a tepid start, but this figure gets substantially back-ended.

   

• Net tax revenues as mentioned above comprise of Corporate Taxes, Personal Income Taxes, central goods & services tax (CGST), GST compensation cess, customs duty on select imports and excise duty on non-GST products like petrol, diesel, and liquor. Securities transaction tax (STT) is included as part of the direct tax collections.

   

• For FY24, the target for non-tax revenue stood at Rs3.02 trillion of which the centre achieved Rs2.66 trillion (88.1%) as of end of October 2023. This percentage looks high since it includes Rs87,416 crore bumper dividend paid to the government by RBI for FY23; and hence cannot be really taken at face value.

   

• On the subject of non-debt capital receipts, the government had set a target of Rs84,000 crore and has achieved 27.4% of the target. This will only pick up momentum once the divestments and the strategic sales pick up; where the visibility is still quite low. This segment looks likely to underperform for the full year FY24.

To sum it up, the government flow of government tax revenues in FY24 is still short of the comparable period in FY23. However, a lot of the benefits will be seen in the form of the lag effect of capex and that would only be visible in the next few months.

Government spending update as of end October 2023

India has traditionally run a deficit; at a fiscal level and at revenue level as expenditures have always exceeded revenues. That gap was filled by borrowings (fiscal deficit). Here is how government spending for FY24 looked as of the end of October 2023.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at Rs45.03 trillion for the full year FY24. As of the end of October 2023, the total expenditure stood at Rs23.94 trillion, or 53.2% of full year target. In FY24, the spending is also slightly lower than comparable period in FY23.

   

• Revenue expenditure, which is targeted at Rs35.03 trillion for FY24 has seen actual spending to the tune of Rs18.47 trillion as of the end of October 2023. That is 52.7% of full year target. The government has taken pains to keep revenue spending in check and that is clear as it is comparatively lower on a yoy basis.

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs5.45 trillion was paid out as of October 2023. Among the other major items of revenue spending in the year were food subsidies, fertilizer subsidies, defence maintenance and social security payments towards pensions and government salaries. 

   

• Capital spending for the full year FY24 is targeted at Rs10.00 trillion of which the government has achieved capex of Rs5.47 trillion as of October 2023 or 54.7% of full year budget. The capex budget grew 50% over last year, and the impact of the higher capital spends is visible in the boost to core sector growth, which has been growing at over 8% for five months in a row.

Despite the constraints and global headwinds, the government has not allowed its budgeted capex commitments to get curtailed in any way. Whether subsidies and elections put pressure on spending remains to be seen; although it may not be too much.

Troika of Deficits: Fiscal, Revenue and Primary

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows fall short of the revenue spending. The bigger challenge is reining in the fiscal deficit as it also has borrowing implications, since the fiscal gap is met by borrowings. Here is a quick look at the 3 most critical deficits.

• The fiscal deficit (budget deficit) for the full year FY24 has been pegged at Rs17.87 trillion and as of the end of October 2023, the fiscal deficit for the year stands at Rs8.04 trillion or 45% of full year target. The frenetic accretion to fiscal deficit between May and July has shifted to a more gradual growth in recent months.

   

• Annual revenue deficit target is Rs8.70 trillion for FY24. As of the end of October 2023, the revenue deficit stood at Rs2.80 trillion or 32.1% of full year target. That means, there has been a return to revenue deficits in October after recording surpluses in August and September 2023. The revenue deficit to fiscal deficit ratio has fallen from 49.90% in July 2023 to 44.25% in August 2023 and further to 32.97% in September 2023; but has marginally risen to 34.81% in October 2023. That is still a very conservative and also a very comfortable level. 

   

• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That is targeted for FY24 at Rs7.07 trillion, and stands at Rs2.59 trillion as of the close of October 2023 or 36.6% of full year target. With rates coming down, the pressure on the interest cost front is surely becoming more manageable for the central government. 

To sum it up, the fiscal deficit, revenue deficit and the primary deficit are on target as of October 2023 and no negative surprise are expected for now. It remains to be seen how effectively the government can contain central fiscal deficit (CFD) under 5.9% for FY24. For now, the H2 borrowing calendar indicates that the government is well and truly on target.

How FY24 fiscal deficit was funded up to October 2023

Out of the total fiscal deficit target of Rs17.87 trillion for FY24, India has touched fiscal deficit of Rs8.04 trillion (45%) as of the end of October 2023. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the Rs8.04 trillion fiscal deficit till the end of October 2023; domestic financing accounted for the bulk (98.8%) at Rs7.94 trillion while international financing was the residual amount. 

Out of the Rs7.94 trillion of domestic financing, market borrowings accounted for the biggest chunk. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. Prima facie, the fiscal deficit target of 5.9% of GDP is looking perfectly achievable for the current fiscal year FY24, in the absence of any nasty macro surprises. The question is what it means for the fiscal deficit target in FY24. The coming budget in Feb-24, just ahead of the elections, should be interesting!