Fiscal deficit touches 35% of full year target as of Sep-21

For the first 6 months of FY22 ending Sep-21, the fiscal deficit stood at 35% of the full year target. This is a sharp departure from FY21, when central government had touched 114.8% of its full year fiscal deficit target by September 2020.

Nov 01, 2021 08:11 IST India Infoline News Service

For the first 6 months of FY22 ending Sep-21, the fiscal deficit stood at 35% of the full year target. This is a sharp departure from FY21, when central government had touched 114.8% of its full year fiscal deficit target by September 2020.

However, this argument has to be a little more nuanced than that. Firstly, the original fiscal deficit estimate for FY21 was only 3.5% of GDP in line with the diktats of the Fiscal Responsibility and Budget Management (FRBM) Act. However, due to the demands of COVID-19 fiscal deficit target was scaled up to 9.5%. The government did close FY21 with fiscal deficit at 9.3%, 20 bps below the estimated target.

For FY22, the fiscal deficit has been estimated at 6.8% of GDP and hence the above numbers are understandable since there is now a lot more leeway for the government. Also, the revenues have improved substantially while the pressure on the government to spend on fiscal boost is not there any longer. Also, the government has managed to put a number of capital outlays on hold.

Fiscal deficit scan for the Apr-Sep period of FY22

For the first 6 months of FY22 ending Aug-21, fiscal deficit in absolute terms stood at Rs526,851cr, which is 35% of the budget estimates. It was 21.1% as of end of July and 31% as of the end of August, so there is some fiscal deficit pressure that appears to be building up and it appears to be back-ended. On a sequential basis, the fiscal deficit has grown by 12.6% over end of August 2021.

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 6 months, the government has a fiscal deficit leeway to the tune of Rs979,961cr. That will enable the government to either marginally cut the fiscal deficit for the year or use it as a buffer in the outside event of Delta variants.

How revenues and expenses behaved in the Apr-Sep period

Total receipts up to Sep-21 were to the tune of Rs10.99 trillion, which is 55.6% of the full year estimated receipts. That is a sharp spike in revenues in the last one month. If you compare with the first 6 months of FY21 ending on September 2020, the actual receipts as of the end of Sep-21 are nearly 94.5% higher.

The total receipts of Rs10.99 trillion consisted of Rs9.21 trillion by way of taxes and Rs1.60 trillion by way of non-tax revenues; largely accounted for by the Rs102,000cr dividend paid by RBI to the government as per recommendations of the Jalan Committee.

For the period ended Sep-21, the total expenditure stood at Rs16.26 trillion or 47.7% of the full year expenditure target for financial year 2021-22. This includes Rs13.97 trillion of revenues expenditure and Rs2.29 trillion of capital expenditure. In the first six months; while revenue spending was 47.7% of full year target, the capital spending was 41.4% of the full year target for capex.

Highlights of the fiscal deficit for the Apr-Sep FY22 period

Here are some key points to keep a tab on.

a) The net tax revenues of Rs9.21 trillion included gross tax collections of Rs11.84 trillion with Rs2.63 trillion representing devolution to states and UTs. The tax revenues in September were twice the median tax revenues in the first 5 months of the fiscal.

b) The non-tax revenues Rs1.60 trillion consists of interest, dividend and other fiscal and economic services, including Rs1.02 trillion RBI dividend.

c) The budgeted interest payment for the full year is Rs8.10 trillion of which Rs3.64 trillion was paid till the end of Sep-21.

d) Revenue deficit up to September 2021 stood at 27.7% of the full year budget. However, revenue deficit for FY22 till date has reduced from 67% to 60% of fiscal deficit.

e) The primary deficit till September 2021 was 23.4% of the full year budget estimates. Primary deficit is fiscal deficit excluding interest payments.

Rating upgrades pre-suppose fiscal deficit control

If funding the fiscal deficit ratio was the challenge in the last one year, the challenge now is to get the fiscal deficit under control. If last  year was an exception, the government must now have a time table to reduce the fiscal deficit to manageable levels.

As Moody’s and Fitch have highlighted, the macroeconomic policy is too smug about the level of fiscal deficit. Levels of 9.3% and 6.8% are fine in abnormal circumstances. The FRBM target was to gradually reduce the fiscal deficit to 3% of GDP but we have gone in the other direction. It is not enough for the government to say that normalization will take 5 years. The key is a timebound action plan.

India could be in problems if it continues to have high debt in the midst of a scenario when the Fed is tightening and bond yields are moving higher. That is already visible and it is time to heed these warning signals and get back to good old solid base economics.

Related Story

Open Free Demat Account (Rs699)
Open ZERO Brokerage Demat Account

  • 0

    Delivery Brokerage for Lifetime

  • 20

    Per order for Intraday, F&O, Currency & Commodity