For the first 3 months of FY23 ending June 2022, the fiscal deficit stood at 21.2% of the full year target. The current year fiscal deficit had been originally projected at 6.4% of GDP in the Union Budget, but that could be pegged higher at around 6.9% due to higher spending to contain inflation. However, the government may also look to cut other outlays.
June was a dry month for IPOs and disinvestments and after the tepid post listing show by LIC, the government is also going slow. The RBI transfer to the government this year has been just about one-third of the transfer done last year, so the figure is much lower than originally budgeted. That has actually hit the revenue collections in the June quarter.
During the June quarter, the government had imposed taxes like export taxes on steel exports, import duties on inputs, windfall tax on oil companies etc. However, with prices abating, the government has toned down these taxes. They will not be able to fully neutralize the inflation costs, so the government would still be left with a gap.
Fiscal deficit trajectory for Apr-Jun FY23
The Controller General of Accounts (CGA) publishes the fiscal deficit data with a lag of 1 month i.e. data up to June 2022 has been published on the last day of July 2022. For the first 3 months of FY23 i.e. the Q1FY23 ending June 2022, the fiscal deficit in absolute terms stood at Rs351,871 crore. That translates into 21.2% of the budget estimates of fiscal deficit for FY23 at Rs16,61,196 crore.
The government has already hinted that the fiscal deficit for the FY23 full year could be higher by about 50 to 60 basis points i.e. 6.9% to 7%. This is largely due to the aggressive fight against inflation, which has had an impact on revenues. While some compensating duties have been levied, it is unlikely to be sufficient. Also, the government is likely to struggle to make up for the short fall in RBI transfers to the centre, that is just about one-third of the previous year.
For FY23, the budget estimate of fiscal deficit is Rs16,61,196cr, which is 6.4% of GDP for the year as per Budget-22. At the current run rate; for the remaining 9 month the government has a fiscal deficit leeway to the tune of Rs13,09,325 crore. However, if the fight against inflation gets sharper, these limits are likely to get used up pretty rapidly. Remember, the fiscal deficit utilization has already moved up very sharply from 4.5% in April 2022 to 12.3% in May 2022 and to 21.2% by the end of June 2022.
How the revenues and expenses panned out for Q1FY23
Total receipts up to June 2022 were to the tune of Rs5.96 trillion, which is already 26.1% of the full year estimated receipts and broadly on track. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections, although the revenues from the RBI transfers were just about one-third of last year. GST collections have been averaging close to Rs150,000 crore per month in the last few months consistently. Despite headwinds in terms of global macros, revenue flows have not seen much of an impact.
The FY23 total receipts of Rs5.96 trillion comprised of Rs5.6 trillion by way of taxes and Rs0.62 trillion by way of non-tax revenues. This was largely accounted for by Rs0.35 trillion by way of dividends and profits (including the RBI transfer) and another Rs0.25 trillion by way of disinvestment of 2.5% stake in LIC. Unlike in the previous year, the contribution of RBI dividend to the government is around one-third of last year.
For the period ended June 2022, the total expenditure (revenue plus capital spending) stood at Rs9.48 trillion or 24.0% of the full year expenditure target for financial year FY23 pegged at Rs39.45 trillion. The total spending of Rs9.48 trillion includes Rs7.73 trillion of revenues expenditure and Rs1.75 trillion of capital expenditure. The biggest components of revenue spending in the first 3 months of FY23 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays were in the area of defence.
Tracking fiscal deficit numbers for April-June FY23
Here are some key takeaways from the build-up of fiscal deficit for FY23.
The net tax revenues of Rs5.06 trillion included gross tax collections of Rs5.68 trillion of which Rs0.62 trillion represents devolution of taxes to states and union territories.
The non-tax revenues have been dominated by the dividend and interest receipts as well as the inflows from the divestment of LIC stake
The budgeted interest payment for the full year is Rs9.41 trillion of which Rs2.29 trillion was paid till the end of June 2022, which is 24.3% of full year target.
Revenue deficit up to June 2022 stood at 20.7% of full year budget. Revenue deficit as a share of fiscal deficit has been marginally lower at 58.2% as of end June 2022
The primary deficit till June 2022 was 17.1% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.
In the first quarter of FY23, revenues fell short of target and it would eventually boil down to handling the expenditure side, especially amidst rising domestic and imported inflation.
Why fiscal discipline matters more than anything now?
When the government announced its Union Budget in February 2022, it had flattered the market with a promise to contain fiscal deficit at 6.4% of GDP. However, the fiscal measures like duty cuts on petrol, diesel and other resources mean that the fiscal deficit number would eventually remain under pressure. For FY23, the government has hinted that the fiscal deficit could spill over to 7%, although the government is trying its best to contain the fiscal deficit by managing expenditure. That can be a delicate game.
In a fluid macro situation, where recession is a possibility, too much of fiscal laxity can be disastrous and the government needs to recognize that. For an emerging market economy, India has one of the highest levels of fiscal deficit as a percentage of GDP. For the time being, the target of 3.5% may be a far cry, but the government must use buoyant revenues to get more aggressive on reducing fiscal deficit. The best way to reverse FPI flows is by walking the talk on fiscal deficit reduction. Otherwise, funding the fiscal deficit could become a big challenge amidst a rising interest rate scenario.