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Fiscal deficit touches 36.3% of full year target as of Oct-21

For the first 6 months of FY22 ending Oct-21, the fiscal deficit stood at 36.3% of full-year target. This is a sharp departure from FY21, when central government had scaled 119.7% of its full year fiscal deficit target by October 2020.

December 06, 2021 8:35 IST | India Infoline News Service
For the first 6 months of FY22 ending Oct-21, the fiscal deficit stood at 36.3% of full-year target. This is a sharp departure from FY21, when central government had scaled 119.7% of its full year fiscal deficit target by October 2020.

However, there are some points to keep in mind. Firstly, the original fiscal deficit estimate for FY21 was only 3.5% of GDP under the provisions 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 closed FY21 with fiscal deficit of 9.3%, a good 20 bps below the estimated target.

For FY22, the fiscal deficit was originally estimated at 6.9% of GDP, which has now been scaled down by 10 bps to 6.8%. Hence this fiscal deficit normalcy must be taken with a pinch of salt as it is more about moving the denominator. However, what cannot be gainsaid is that revenues have improved substantially while the pressure on the government to spend on fiscal boost is not as acute as last year.

Fiscal deficit chart for Apr-Oct period of FY22

For the first 7 months of FY22 ending Oct-21, fiscal deficit in absolute terms stood at Rs547,026cr, which is 36.3% of the budget estimate of Rs1,506,812cr. The cumulative fiscal deficit as percentage of the full fiscal year target stood at 21.1% as of end July, 31% as of end August and 35% as of end September. As of Oct-21 that has just moved up to 36.3%. On a sequential basis, the fiscal deficit share growth has been marginal over Aug-21.

For FY22, the budget estimate of fiscal deficit is Rs1,506,812cr, which is 6.8% of GDP for the year. The share has moved from 6.9% to 6.8% on account of the higher GDP. That means; for the remaining 5 months, the government has a fiscal deficit leeway to the tune of Rs932,786cr. The government can either marginally cut the fiscal deficit for the year or use it as a buffer amidst the now-imposing Omicron Variant threat.

How revenues and expenditure panned out in the Apr-Oct period

Total receipts up to Oct-21 were to the tune of Rs12.60 trillion, which is already 70.5% of the full year estimated receipts. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections. If you compare with the first 7 months of FY21 ending on October 2020, the actual receipts as of the end of Oct-21 are nearly 82.10% higher.

The FY22 total receipts of Rs12.60 trillion comprised of Rs10.53 trillion by way of taxes and Rs2.07 trillion by way of non-tax revenues. These non-tax revenues were largely accounted for by the Rs102,000cr dividend paid by RBI to the government as per the recommendations of the Bimal Jalan Committee.

For the period ended Sep-21, the total expenditure (revenue plus capital spending) stood at Rs18.27 trillion or 52.4% of the full year expenditure target for financial year 2021-22. This includes Rs15.73 trillion of revenues expenditure and Rs2.53 trillion of capital expenditure. The biggest components of spending in the first 7 months of FY22 were defence spending, crop subsidies, fertilizer subsidies and food subsidies.

Analysis of the fiscal deficit for Apr-Oct FY22 period

Here are some key points to keep a tab on.

a) The net tax revenues of Rs10.53 trillion included gross tax collections of Rs13.64 trillion with Rs3.11 trillion representing devolution to states and UTs.

b) The non-tax revenues of Rs2.07 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 Rs4.00 trillion was paid till the end of Oct-21.

d) Revenue deficit up to September 2021 stood at 27.5% of the full year budget. However, revenue deficit as a share of fiscal deficit has progressively reduced from 67% in Aug-21 to 60% in Sep-21 to 57% in Oct-21.

e) The primary deficit till October 2021 was 21.1% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.

It is now time to prune the fiscal deficit ratio fast

With revenues buoyant and the COVID spending done and dusted, the real challenge is bringing the fiscal deficit ratio under control. In the last 1 month, Moody’s held the rating but upgraded outlook while Fitch was unwilling to upgrade the outlook. In both cases, the major area of concern was high fiscal deficit and rising government debt.

Macroeconomic policy has been too smug about level of fiscal deficit. Levels of 9.3% and 6.8% are fine in abnormal circumstances, but it is time to normalize. The last Union Budget had spoken about cutting the fiscal deficit to 4.5% by 2026, which is too optimistic and profligate. The key is a timebound action plan.

Current fiscal deficit and government debt are too high by rating peer-group standards. Fed is tightening and bond yields are moving higher and the RBI could follow suit. It is time to heed these warning signals and return to good old FRBM principles.

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