H1FY23 Fiscal deficit at 37.3% of full year target on capex thrust

In the month of July 2022, India had reported fiscal and revenue surplus after a gap of almost 28 months. However, this surplus was unlikely to be sustainable amidst rising government spending. That is the way it has panned out, although the revenue account is in a surplus in September 2022. After incremental fiscal deficit of Rs200,770 crore in August, the month of September 2022 saw fiscal deficit accretion of Rs78,428 crore.

That is the incremental monthly story and not the cumulative story. On a cumulative basis, total central fiscal deficit stood at Rs619,849 crore representing 37.3% of the total fiscal deficit for fiscal FY23 as per budget estimates. What is interesting about this growth in fiscal deficit in September 2022is that it was largely triggered by a spike in capex. For instance, total government capex for September 2022 stood at Rs90,561 crore.

How does this capex look like in relative terms? The September 2022 capex of Rs90,561 crore is 57.5% higher compared to the capex in September 2021. If you look at capex on a sequential basis, the capex for September 2022 at Rs90,561 crore is 107% higher than August 2022. This is also the highest capex recorded in any month in this fiscal. The impact was evident in the latest core sector numbers which saw the output of steel and cement grow aggressively on a yoy basis and also on a  high frequency MOM basis.

Here is a look at the fiscal deficit picture for FY23

The Controller General of Accounts (CGA) publishes the fiscal deficit data with a lag of 1 month i.e. data up to September 2022 was published on the last working day of October 2022. For the first 6 months of FY23 (April to September 2022), the fiscal deficit in absolute terms stood at Rs619,849 crore. That translates into 37.3% of the budget estimates of fiscal deficit for FY23 at Rs16,61,196 crore.

There were fears that the government may have to revise the fiscal deficit higher from 6.4% to about 6.9% due to its aggressive fight against inflation. That does not look necessary now. Fiscal policy to control inflation included cuts in import duties to cut input costs. That is also revenue constricting and that was putting the fiscal position in jeopardy. However, there have been several positives since, which may actually help rein in fiscal deficit in FY23.

For starters, the direct tax collections have been extremely robust, especially in corporate taxes, followed by personal income taxes. Secondly, the indirect taxes led by GST flows have been above Rs1.45 trillion a month on a consistent basis; even crossing Rs1.50 trillion for the latest month. Further, the government has taken up sharp expenditure cuts in the last few months without impeding capex. In fact, government doubled capex on MOM basis and grew it 57.5% on a yoy basis in September 2022. Government may, therefore, not only protect the 6.4% fiscal deficit commitment, but even better it. It still has leg room left, with Rs10,41,347 crore of fiscal deficit still available in the remaining six months.

How the rupee came in and how it went out in FY23

Total receipts up to September 2022 were to the tune of Rs12.04 trillion, which is already 52.7% of the full year estimated receipts. However, the net revenues in September has again taken a hit on account of the heavy refund pay-outs. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections. This has more than offset the lower flows from RBI transfers and from disinvestment of PSUs. One cannot ignore headwinds like global hawkishness, supply chain constraints, recession fears and commodity inflation. However, revenue flows have not only been steady, but also robust.

The FY23 total receipts of Rs12.04 trillion comprised of Rs10.12 trillion by way of taxes and Rs1.58 trillion by way of non-tax revenues. Among the non-tax revenues the RBI dividend to the government for FY22 fell to 0.30 trillion from Rs0.99 trillion in FY21, which was a major disappointment for the government. The other major head was flows from disinvestment revenues, predominantly from the sale of 3% stake in LIC in May 2022. IDBI sale is likely to happen only in the next fiscal. Non-tax revenues are lower on yoy basis.

For the 6 months ended September 2022, the total expenditure (revenue plus capital spending) stood at Rs18.24 trillion or 46.2% of the full year expenditure target for financial year FY23 pegged at Rs39.45 trillion. The total spending of Rs18.24 trillion includes Rs14.81 trillion of revenues expenditure and Rs3.43 trillion of capital expenditure. The biggest components of revenue spending in the first 6 months of FY23 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays were in defence, but the Rs90,000 crore accretion to capital spending in September 2022 is the good news.

Story of how the deficits panned out in FY23

Here are some key takeaways from the build-up of the various deficits in FY23.

1. The net tax revenues of Rs10.12 trillion included gross tax collections of Rs13.92 trillion of which Rs3.80 trillion represents devolution of taxes to states and tax refunds.
2. The non-tax revenues have been dominated by the dividend and interest receipts as well as the inflows from the divestment of LIC stake
3. The budgeted interest payment for the full year is Rs9.41 trillion of which Rs4.37 trillion was paid till the end of September 2022, which is 46.4% of full year target.
4. Revenue deficit up to September 2022 stood at 31.4% of full year budget due to a revenue surplus of Rs9,653 crore in September 2022, largely due to focus on capex. Revenue deficit as a share of fiscal deficit has fallen from 59% to 50.2% MOM.
5. The primary deficit till September 2022 was 25.4% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.

The one indication that the eventual fiscal deficit may be lower than 6.4% of GDP is that the government has decided to reduce the borrowing target for H2FY23 by Rs10,000 crore.

Government is juggling fiscal deficit fairly effectively

In the February 2022 Union Budget, the government had impressed the markets with its decision to peg fiscal deficit at 6.4%. While this is still far from the FRBM targets, we need to factor in the impact of the pandemic. However, there are 3 things that emerge.

• The government has shown a bias for spending more of capex which shows why the revenue account is in surplus despite the fiscal deficit overall.
• Even in revenue spending, the government has increased its subsidy bills for food and fertilizers, which is value accretive from an income boost perspective.
• In the final analysis, the government may either meet the 6.4% fiscal deficit target or even better it. But it is likely to keep revenue deficit at under 50% of fiscal deficit.

The government gave the first signal of its seriousness to contain fiscal deficit by reducing borrowing target for H2-FY23. Despite headwinds like the Ukraine war and China COVID disruptions, fiscal deficit may be on target or even better. That would be help the sovereign ratings and also the INR value.