Normally, in the month of May; 2 sets of fiscal deficit numbers are announced by the CGA. There is the full year fiscal deficit for previous fiscal year i.e. FY22. In addition, the monthly fiscal deficit update for April is also announced. At the close of May 2022, the Controller General of Accounts (CGA) announced both fiscal deficit numbers separately. Since the main area of interest is the full year fiscal deficit for FY22, that will be our primary focus. We will also dwell in brief on the April fiscal deficit update.
How does the fiscal deficit for FY22 look like?
For the full fiscal year FY22, the fiscal deficit stood at 99.7%, almost achieving the full year target. Like FY21, even FY22 has seen an overshooting of fiscal deficit from the original FRBM targets. Of course, these targets have been kept in abeyance, at least till FY26, and government plans to revisit these targets only later.
For FY22, the fiscal deficit was originally estimated at 6.9% of GDP but ended the year 20 bps better at 6.7%. On a yoy comparison, that is substantially lower than the 9.2% fiscal deficit in FY21. However, the government has already warned that FY23 targets for fiscal deficit could overshoot from 6.4% to 6.9% as the government embarks on an aggressive anti-inflation battle.
How were the major flow items? The loss of divestment flows from LIC and BPCL in FY22 were partially compensated by the advance spectrum fee payments by telecom companies. The real reason why the fiscal deficit for FY22 was 20 bps lower at 6.7% was partially due to lower capital outlays, but substantially due to a surge in direct and indirect tax revenues. This was triggered by improved economic activity and better compliance.
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, the borrowing target for FY23 is already 18.8% higher than the corresponding FY22 figure. Now we get the first indication from the government that the battle against inflation could take fiscal deficit back to 6.9% for FY23. The battle against fiscal deficit is will be a lot tougher and longer than originally envisaged.
What we read about the fiscal deficit in FY22
For FY22 (April 2021 to March 2022), the fiscal deficit in absolute terms was Rs15,86,537 crore. This absolute fiscal deficit is approximately 99.7% of the budget estimates of Rs15,91,089 crore for FY22. The fiscal deficit could have been much lower had the divestment of LIC and BPCL happened in FY22 itself. However, this was partially compensated by the flows from advance telecom spectrum fee receipts.
However there were some positives for fiscal deficit number for FY22. On the one hand, the revenues from direct taxes and GST were better than expected on robust economic activity. Also, the tax department has combined better monitoring and tighter technology driven compliance to reduce leakage of revenues. To an extent, capital spending was also put off in the last quarter, but that is not substantial.
How the revenues and expenses panned out in FY22?
Revenue receipts FY22 were to the tune of Rs21.68 trillion, which is 104.3% 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 March 2022, the government witnessed record GST revenues of over Rs1.60 trillion. More importantly, the average run has been above Rs1.40 trillion on a monthly basis.
The FY22 revenue receipts of Rs21.68 trillion comprised of Rs18.20 trillion by way of taxes and Rs3.48 trillion by way of non-tax revenues. Non tax revenues got a big boost from the advance telecom spectrum fees, PSU dividends and the RBI dividend. March 2022 tax revenues at Rs4.34 trillion was the highest ever single-month collection in history. This was, once again, a combination of higher economic activity and better compliance. Total receipts, including capital receipts for FY22 stood at Rs22.08 trillion.
Let us now turn to the expenditure components for FY22. Total expenditure (revenue plus capital spending) stood at Rs37.94 trillion for FY22. This includes Rs32.01 trillion of revenue expenditure and Rs5.93 trillion of capital expenditure. The biggest components of revenue spending in 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 loss on sale of Air India to the Tata group.
A tale of 3 deficits for FY22
For fiscal year FY22, here is a quick look at the 3 important deficits viz. fiscal deficit, revenue deficit and the primary deficit.
a) Fiscal deficit (budgetary gap) for FY22 stood at Rs15.87 trillion or 99.7% of full year target. In percentage terms, fiscal deficit for FY22 stood at 6.71% of GDP.
b) Revenue deficit (borrowing for breakfast) for FY22 stood at Rs10.33 trillion or 94.8% of full year target. Revenue deficit was 4.37% of GDP and it was 65% of fiscal deficit.
c) Primary deficit (excluding interest) for FY22 stood at Rs7.81 trillion or 100.5% of full year target. This is considered rather high by emerging market standards at 3.4% of GDP.
A quick look at the fiscal deficit picture for April 2022
April marks the first month of FY23 and the fiscal data for April 2022 was also announced by the Controller General of Accounts (CGA) on the last day of May. For the month of April 2022, the net revenue receipts of Rs1.97 trillion was 8.9% of full year budgeted receipts of Rs22.04 trillion. Total receipts for April 2022, including capital receipts, stood at Rs2 trillion, or 8.8% of full year target. The tax receipts included Rs2.32 trillion of gross inflows reduced by Rs35,000 crore devolution to states.
Total expenditure for April 2022 was Rs2.75 trillion or 7% of full year budgeted expenditure of Rs39.45 trillion. In terms of fiscal deficit, at Rs74,846 crore, it was just about 4.5% of full year fiscal deficit target. However, with its battle against inflation forcing lower customs duties, the government has already tweaked the fiscal deficit target higher from 6.4% to 6.9% of GDP.
The challenge for the government, once again, is to contain the fiscal deficit. If the fight against inflation continues, fiscal measures may call for above 7% fiscal deficit target. That would take the 2026 target for normalization of fiscal deficit much farther.