For the first 9 months of FY22 ending Dec-21, the fiscal deficit stood at 50.4% of full year target against 46.2% at the end of Nov-21. This is a sharp departure from FY21, when central government had scaled 145.5% of full year fiscal deficit target by Dec-20.
This huge disparity should be largely attributed to late tweaks in fiscal deficits announced in the Feb-21 Union Budget. The original fiscal deficit estimate for FY21 was 3.5% of GDP under the FRBM Act. However, due to a surge in fiscal spending on account of COVID-19, the fiscal deficit target was revised to 9.5% for FY21. Thanks to a late revival in revenues and back-ending of government outlays, India ended FY21 with fiscal deficit of 9.3%.
For FY22, the fiscal deficit was originally estimated at 6.9% of GDP and revised to 6.8% on account of higher GDP. At the current rate, even assuming that the LIC and BPCL IPOs don’t happen, India may end FY22 with fiscal deficit of 6.7% or 6.8% of GDP. The big conundrum is about the estimated fiscal deficit for FY23, which is estimated in the range of 6.0%-6.5%, but we have to await the budget announcement to know the details.
Fiscal deficit trajectory for Apr-Dec 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 Dec-21 is published on the last day of Jan-22. For the first 9 months of FY22, fiscal deficit in absolute terms stood at Rs759,366cr, which is 50.4% of the budget estimate of Rs15,06,812cr. The cumulative fiscal deficit as share of full fiscal year target stood at 36.3% as of Oct-21 and 46.2% as of Nov-21. The fiscal deficit utilization has risen sharply in the last couple of months by 1,400 basis points.
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 3 months, the government has a fiscal deficit leeway to the tune of Rs747,446cr. With Omicron under check, government could use this buffer in case the LIC IPO has to be put off to FY23.
Government revenues and expenses for Apr-Dec FY22
Total receipts up to Dec-21 were to the tune of Rs17.62 trillion, which is already 89.1% 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 9 months of last year, the actual receipts this year are nearly 57.06% higher.
The FY22 total receipts of Rs17.62 trillion comprised of Rs14.74 trillion by way of taxes and Rs2.59 trillion by way of non-tax revenues; largely accounted for by Rs1.37 trillion by way of dividends and profits. The biggest chunk under this header was the Rs102,000cr dividend paid by RBI to the government as part of its annual dividend transfer.
For the period ended Dec-21, the total expenditure (revenue plus capital spending) stood at Rs25.21 trillion or 72.4% of the full year expenditure target for financial year 2021-22. This includes Rs21.29 trillion of revenues expenditure and Rs3.92 trillion of capital expenditure. The biggest components of revenue spending in the first 9 months of FY22 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays till date has been in civil aviation, which is largely the losses on account of the sale of Air India to the Tata group.
How does the fiscal deficit look like for Apr-Dec FY22
Here are some key points to keep a tab on.
a) The net tax revenues of Rs14.74 trillion included gross tax collections of Rs19.29 trillion with Rs4.55 trillion representing devolution of taxes to states and union territories.
b) The non-tax revenues of Rs2.59 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 Rs5.64 trillion was paid till the end of Dec-21.
d) Revenue deficit up to Dec-21 stood at 52.2% of full year budget. Revenue deficit as a share of fiscal deficit had moved from 67% in Aug-21 to 57% in Oct-21 to 63.64% in Nov-21. The sharp fall in Dec-21 is purely due to the Air India loss reported as capital outlay.
e) The primary deficit till Dec-21 was 28% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.
Time to prune fiscal deficit aggressively
With revenues buoyant and COVID spending sharply lower, Budget 2022 must use this opportunity to prune the fiscal deficit rapidly. In the Feb-21 Union Budget, the government had spoken about reducing fiscal deficit to 4.5% by 2026. That statement appears to lack ambition and the focus will be on what is actually achieved in FY23.
It is time for the government to set a timeline for cutting the fiscal deficit to 3.5% by FY25. It will not only position India better in the BRICS peer group, but also offset the global rate hawkishness risk. The sooner the government gets pragmatic about cutting the fiscal deficit rapidly, the better it would be. Budget 2022, could just be that golden opportunity for a prudent start.