However, this argument is not as straightforward as it appears. Firstly, the original fiscal deficit estimate for FY21 was 3.5% of GDP, but due to the demands of COVID-19 it was scaled up to 9.5%. For FY22, the fiscal deficit has been estimated at 6.8% of GDP and hence the above numbers are understandable. Also, the revenues have improved substantially while the government has put a number of capital outlays on hold.
Tracking fiscal deficit for the Apr-Aug period of FY22
For the first 5 months of FY22 ending Aug-21, fiscal deficit in absolute terms stood at Rs468,009cr, which is 31% of the budget estimates. In fact, it was just 21.1% as of end of July, so there has been a substantial surge in fiscal deficit in August, On a sequential basis, the fiscal deficit has grown by 45.7% over end of July.
For FY22, the budget estimate of fiscal deficit is Rs15,06,812cr, which is 6.8% of GDP for the year. That means; for the remaining 7 months, the government has a fiscal deficit leeway to the tune of Rs10,38,803cr. That will enable the government to either revive its capex programs or substantially cut the fiscal deficit for the full year.
How did revenues and expenses pan out in the Apr-Aug period
As per latest data put out by the Controller General of Accounts (CGA), total receipts up to Aug-21 were to the tune of Rs8.09 trillion, which is 40.9% of the full year estimated receipts. If you compare with the first five months of FY21, the revenue receipts as of the end of Aug-21 are nearly 114.3% higher.
The total receipts of Rs8.09 trillion consisted of Rs6.45 trillion by way of taxes and Rs1.49 trillion by way of non-tax revenues; largely accounted for by the Rs102,000cr dividend paid by RBI to the government.
For the period ended Aug-21, the total expenditure stood at Rs12.77 trillion or 36.7% of the full year expenditure target. This includes Rs11.05 trillion of revenues expenditure and Rs1.72 trillion of capital expenditure. In the first five months; while revenue spending was 37.7% of full year target, the capital spending was just 31.1%.
Highlights of the fiscal deficit for the Apr-Aug period
Here are some key points to keep a tab on.
a) The net tax revenues of Rs6.45 trillion included gross tax collections of Rs8.60 trillion with Rs2.15 trillion representing devolution to states and UTs.
b) The non-tax revenues Rs1.49 trillion consists of interest, dividend and other fiscal and economic services. The biggest chunk of Rs1.02 trillion was RBI dividend.
c) The budgeted interest payment for the full year is Rs8.10 trillion of which Rs2.78 trillion was paid till the end of Aug-21.
d) Revenue deficit up to August 2021 stood at 27.3% of the full year budget. However, the revenue deficit for FY22 till date is a steep 67% of fiscal deficit.
e) The primary deficit till August 2021 was 27.2% of the full year budget estimates. Primary deficit is fiscal deficit excluding interest payments.
Funding the fiscal deficit is the challenge
Going ahead, the big challenge could be funding the fiscal deficit. Normally, fiscal deficit is funded through borrowings, for which the government already has an elaborate borrowing program laid out. But the challenge is that the debt ratios are going up sharply.
Public debt as a share of GDP rose from 42.4% in FY20 to 52% in FY21. Internal debt has gone up in the last one year from 39.4% of GDP to 48.5% of GDP. If you now look at the total debt, it has gone up from 51.6% of GDP in FY20 to 60.5% in FY21.
The problem is that macroeconomic policy is still too smug about the level of fiscal deficit. Levels of 9.3% and 6.8% are acceptable in abnormal years. But, there has to be a clear timetable to wind down this fiscal deficit back to FRBM levels of 3.5%. In the Union Budget 2021, the government has already hinted that normalization will take more than 5 years. That is not great news for India’s external ratings.
Above all, high borrowings will push up yields and impel the RBI to adopt a more hawkish policy stance. The risks of hawkishness, as we have seen in 2018, can entail a huge price for the economy in terms of growth.