For the first 8 months of FY22 ending Nov-21, the fiscal deficit stood at 46.2% of full year target against 36.3% at the end of Oct-21. This is a sharp departure from FY21, when central government had scaled 135.1% of full year fiscal deficit target by Nov-20.
However, this huge disparity can be attributed to late tweaks in fiscal deficits announced in the Feb-21 Union Budget. The original fiscal deficit estimate for FY21 was only 3.5% of GDP under the FRBM Act. However, due to the fiscal pressures created by COVID-19, the fiscal deficit target was revised to 9.5% for FY21. The government closed FY21 with fiscal deficit of just 9.3% of GDP by postponing government outlays in late FY21.
For FY22, the fiscal deficit was originally estimated at 6.9% of GDP and revised to 6.8% on account of higher GDP. However, at current run-rate, India may end FY22 with fiscal deficit of 6.5% or 6.6% of GDP. One thing is that the post-COVID recovery appears to be credible now, with revenues improving substantially while spending pressures are much lower.
Fiscal deficit trajectory for Apr-Nov FY22
The Controller General of Accounts (CGA) normally publishes the fiscal deficit data with a lag of 1 month i.e. the fiscal deficit data up to Nov-21 is published on the last day of Dec-21. For the first 8 months of FY22, fiscal deficit in absolute terms stood at Rs695,614cr, which is 46.2% of the budget estimate of Rs15,06,812cr. The cumulative fiscal deficit as share of full fiscal year target stood at 35% as of Sep-21 and 36.3% as of Oct-21. Clearly, there is a 1000 basis points additional utilization of fiscal deficit room in Nov-21
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 4 months, the government has a fiscal deficit leeway to the tune of Rs811,198cr. The government is most likely to use the fiscal deficit leeway prudently to keep a back-up buffer in case the Omicron situation worsens.
How government revenues and expenses panned out in Apr-Nov period
Total receipts up to Nov-21 were to the tune of Rs13.79 trillion, which is already 69.8% 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 8 months of last year, the actual receipts this year are nearly 65.97% higher.
The FY22 total receipts of Rs13.79 trillion comprised of Rs11.35 trillion by way of taxes and Rs2.23 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.
For the period ended Nov-21, the total expenditure (revenue plus capital spending) stood at Rs20.75 trillion or 59.6% of the full year expenditure target for financial year 2021-22. This includes Rs18.01 trillion of revenues expenditure and Rs2.74 trillion of capital expenditure. The biggest components of spending in the first 8 months of FY22 were defence services, crop subsidies, fertilizer subsidies and food subsidies.
Dissecting fiscal deficit for Apr-Nov FY22
Here are some key points to keep a tab on.
a) The net tax revenues of Rs11.35 trillion included gross tax collections of Rs15.42 trillion with Rs4.07 trillion representing devolution of taxes to states and union territories.
b) The non-tax revenues of Rs2.23 trillion consists of interest, dividend and other fiscal and economic services, predominated by Rs1.02 trillion RBI dividend.
c) The budgeted interest payment for the full year is Rs8.10 trillion of which Rs4.60 trillion was paid till the end of Nov-21.
d) Revenue deficit up to Sep-21 stood at 38.8% of full year budget. Revenue deficit as a share of fiscal deficit had progressively reduced from 67% in Aug-21 to 57% in Oct-21. However, Nov-21 saw a spike in this ratio back to 63.64% levels.
e) The primary deficit till Nov-21 was 33.8% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.
Target for FY23 should be to prune fiscal deficit
With revenues buoyant and COVID spending sharply lower, the challenge is to bring fiscal deficit ratio under control. The government, in its Feb-21 Union Budget had spoken about reducing the fiscal deficit to around 4.5% by 2026. While that may look good on paper, it is unlikely to be value accretive for the Indian economy.
Even if India ends up with lower fiscal deficit of 6.5% in FY22, it is hardly a comfortable scenario. It is time for the government to set a timeline for cutting the fiscal deficit to 3.5% over the next 2 years, and such a statement would give a lot of confidence to markets.
Current fiscal deficit levels are too high by peer-group rating bracket and could impact sovereign ratings. The bond coupons that the government wants to pay is out of sync with the market reality and that is leading to devolvement. It is time to get pragmatic and make lower fiscal deficit a top priority.