For the first 11 months of FY22 ending Feb-22, fiscal deficit stood at 82.7%, sharply higher compared to 58.9% at the end of Jan-22 and 50.4% at the end of Dec-21. The huge shortfall in fiscal deficit targets that we have seen in the last few months has been largely made up and by the close of March 2022, we should touch 100% of full year fiscal deficit done.
For FY22, it may be recollected that the fiscal deficit was originally estimated at 6.9% of GDP and revised to 6.8% on the back of higher GDP estimates. However, Budget-22 presented on 01-Feb this year, pegged back the fiscal deficit for FY22 at 6.9%. Without the LIC IPO, either this fiscal deficit may end up being higher or government will have to cut expenses.
The government should get some relief on the inflows from the aggressive prepayment of spectrum dues by telecom companies, which has already overshot the targets by more than 25%. For FY23, fiscal deficit has been pegged at 6.4% of GDP in Budget-22, hinting at keenness to wind down lofty fiscal deficit targets. However, it must be noted that the borrowing target for FY23 is already 18.8% higher than the corresponding FY22 figure.
Fiscal deficit trajectory for Apr-Feb FY22
The Controller General of Accounts (CGA) publishes the fiscal deficit data with a lag of 1 month i.e. data up to Feb-22 has been published on the last day of Mar-22. For the first 11 months of FY22 ending Feb-22, the fiscal deficit in absolute terms stood sharply higher at Rs13,16,595cr, nearly 41% higher than the Jan figure, which shows a lot of fiscal deficit has got recorded in Feb-22. The absolute fiscal deficit at Rs13,16,595cr is 82.7% of the budget estimates of Rs15,91,089cr for the full year FY22.
The sharp spike in the fiscal deficit could be largely because some of the major sources of revenues like the LIC IPO and the BPCL IPO had to be put off to next year. Devolutions were also much higher in Feb-22. The cumulative fiscal deficit as share of full fiscal year target stood at 36.3% as of Oct-21, 46.2% as of Nov-21 and 50.4% as of Dec-21. From 58.9% of the full year fiscal deficit as of end Jan-22, the fiscal deficit shot up in the last one month to 82.7% of the full year fiscal deficit.
For FY22, the budget estimate of fiscal deficit is Rs15,91,089cr, which is 6.9% of GDP for the year as per Budget-22. At the current run rate as of end of Feb-22; for the remaining 1 month the government has a fiscal deficit leeway to the tune of Rs274,494cr. However, with several sources of inflows unlikely to materialize in this FY22 and with a highly uncertain environment, the government will be needing this buffer and may overshoot marginally.
Revenue and expenditure story for Apr-Feb FY22
Total receipts up to Feb-22 were to the tune of Rs18.27 trillion, which is already 83.9% of the full year estimated receipts. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections. In fact, for the month of Feb-22, the government has recorded all-time high GST flows of Rs1.42 trillion. If you compare with the first 11 months of last year, the actual receipts this year are nearly 29.31% higher.
The FY22 total receipts of Rs18.72 trillion comprised of Rs14.81 trillion by way of taxes and Rs3.10 trillion by way of non-tax revenues; largely accounted for by Rs1.42 trillion by way of dividends and profits. The biggest chunk under this header was the Rs1.02 trillion dividend paid by RBI to the government as part of its annual dividend transfer. Ironically, the government reported negative net revenue receipts in Feb-22 due to higher devolution of taxes to states.
For the period ended Feb-22, the total expenditure (revenue plus capital spending) stood at Rs31.44 trillion or 83.4% of the full year expenditure target for financial year 2021-22. This includes Rs26.59 trillion of revenues expenditure and Rs4.85 trillion of capital expenditure. The biggest components of revenue spending in the first 11 months of FY22 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays were in the area of defence followed by civil aviation, which is largely the losses on account of the sale of Air India to the Tata group.
Tracking the fiscal deficit for Apr-Feb FY22
Here are some key points pertaining to the build-up of fiscal deficit for FY22, to date.
a) The net tax revenues of Rs14.81 trillion included gross tax collections of Rs22.75 trillion with Rs7.94 trillion representing devolution of taxes to states and union territories.
b) The non-tax revenues of Rs3.10 trillion consists of interest, dividend and other fiscal and economic services, dominated by Rs1.02 trillion RBI dividend.
c) The budgeted interest payment for the full year is Rs8.14 trillion of which Rs6.71 trillion was paid till the end of Feb-22, which is 82.4% of full year target.
d) Revenue deficit up to Feb-22 stood at 79.7% of full year budget. Revenue deficit as a share of fiscal deficit has fallen from a high of 67% in Aug-21 to 56.4% in Jan-22. However, this ratio of revenue deficit to fiscal deficit bounced back to 65.9% in Feb-22.
e) The primary deficit till Feb-22 was 83.1% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.
India must not lose sight of fiscal deficit control
The fiscal deficit appears to be on target for 6.9% in FY22, but divestment targets have consistently fallen short of expectations and FY22 has been no different. In FY22, divestment shortfall may have been partially offset by prepayment of spectrum fees. However, FY23 would be more challenging. Direct and indirect tax revenues may have peaked and there is limited scope to tax oil further. In these conditions, the best that the government can do is to provide a 3-5 year glide path for lowering fiscal deficit. It may sound ambitious, but that would be India’s best economic hedge in these uncertain times.