Fiscal Deficit at 39.3% of FY24 target at the close of first half

1 Nov 2023 , 09:26 AM

Fiscal deficit grows at subdued rate in September 2023

The fiscal deficit data, along with the statement of government accounts for the first half of FY24 up to September 2023 is quite interesting. While the fiscal deficit had shown a rapid increase in the months of June and July, the growth has tapered in August and also in September 2023. Fiscal deficit as a percentage of full year target had just risen from 33.9% to 36% as of August 2023; and now at the end of the first half of FY24, the fiscal deficit as a percentage of full year target has just grown from 36% to 39.3%. Even assuming that the second half of FY24 sees more spending pressure on the central government, the fiscal deficit target of 5.9% of GDP for FY24 should be easily defended. There are certainly some risk factors. General elections are less than a year away and there are major state elections coming up this year. So, the government spending could rise. As of the close of September 2023, the CGA (Controller General of Accounts) has published the fiscal deficit data of September 2023 along with the cumulative data for the first half of fiscal FY24. 

Can the fiscal deficit target of 5.9% for FY24 be defended?

In FY23, the central fiscal deficit (CFD) had been pegged in the Union Budget 2022-23 at 6.4% of GDP. The actual fiscal deficit for FY23 was slightly lower at 6.32% of GDP; which is appreciable considering that the government had to spend aggressively amidst high inflation. However, this was helped by a surge in tax revenues. That encouraged the Finance Ministry to set a more ambitious target of 5.9% for FY24. However, this lower fiscal deficit target for FY24 is based on certain assumptions. It assumes robust direct and indirect tax revenues as well as reduced (or at least stable) subsidies. Taxes are robust, although not as robust as last year. In last 2 years, the central government has spent more than budgeted on the capex side, generally at the cost of revenue spending. The logic is the strong externalities and the multiplier effect of government capex spending, and the catalytic impact. To an extent, that has boosted government revenues. To the credit of the government, it has maintained its borrowing target at Rs6.55 trillion for the H2-FY24, which is a signal that full year fiscal deficit has no major surprises in store.

But, risk factors to FY24 fiscal deficit cannot be ignored

While numerically, the fiscal deficit numbers look to be gratifying, there are some obvious risks. Fiscal, in any year, tends to be back-ended. That has been the experience in India in the last few years. Here are some risks to the assumption that defending the 5.9% fiscal deficit target should be a cakewalk.

• The revenues from taxes are still strong, but the robustness of FY23 is missing. In FY23, the robust direct and indirect taxes offset lower divestment revenues. Also, the higher capex was kept in check with controls over revenue spending. Being an election year, FY24 could see spillovers on multiple fronts.

   

• The disinvestment revenues were sharply lower this year and is once again likely to fall short. However, there are good tidings in the form of higher RBI dividends and better than expected monetization flows. 

   

• While domestic growth is still strong, the export driven global growth is faltering. That is likely to have an impact on tax flows in this year and it is feared that things could tighter in the second half of FY24. Already, services exports have also come under pressure.

   

• There could be some surprises in the subsidy bill this year. Fertilizer subsidies may be lower, but the extension of the free food program and crude prices above $90/bbl are areas of concern for the subsidy bill. This year, oil subsidies could be well and truly back. 

For the government, the second half could be a lot more testing, with multiple pressure on the domestic, and the global geopolitical front.

How did government revenues pan out as of end September 2023

With data up to the end of September 2023 now available, we have an evolving picture of how the revenues are panning out in FY24 as compared to the targets. Revenue flows in FY24 are seeing good traction. Here are some key data points.

• Against the full year total revenue target of Rs27.16 trillion, the central government has achieved Rs14.17 trillion of revenues as of the end of H1-FY24. That is, 52.2% of full year revenue target, which is at par with the comparable period in FY23.

   

• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the full year target for net tax revenues (net of refunds and devolvement) at Rs23.31 trillion, the government has achieved net tax revenues of Rs11.60 trillion as of the end of September 2023, showing 49.8% target achieved. This has improved sharply in the last two months; and almost at par with the previous year.

   

• Net tax revenues as mentioned above comprise of Corporate Taxes, Personal Income Taxes, central goods & services tax (CGST), GST compensation cess, customs duty on select imports and excise duty on non-GST products like petrol, diesel, and liquor. Securities transaction tax (STT) is included as part of the direct tax collections.

   

• For FY24, the target for non-tax revenue stood at Rs3.02 trillion of which the centre achieved Rs2.37 trillion (78.5%) as of end of September 2023. This percentage looks high since it includes Rs87,416 crore bumper dividend paid to the government by RBI for FY23; almost 2.5 times the street expectation. 

   

• On the subject of non-debt capital receipts, the government had set a target of Rs84,000 crore and has achieved 24% of the target. This will only pick up momentum once the divestments and the strategic sales pick up; where the visibility is still quite low.

To sum it up, the government flow of government tax revenues in FY24 has now grown to be at par with FY23, as of the end of H1-FY24. The good news is that, in terms of overall revenues in absolute term, India is better off that it was after H1-FY23.

Government spending summary as of end September 2023

India has traditionally run a deficit; at a fiscal level and at revenue level as expenditures have always exceeded revenues. That gap was filled by borrowings (fiscal deficit). Here is a look at government spending for FY24 till end August 2023.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at Rs45.03 trillion for the full year FY24. As of the end of September 2023, the total expenditure stood at Rs21.192 trillion, or 47.1% of full year target. In FY24, the spending is already ahead of FY23, and the gap is widening.

   

• Revenue expenditure, which is targeted at Rs35.03 trillion for FY24 has seen actual spending to the tune of Rs16.29 trillion as of the end of September 2023. That is 46.5% of full year target. Revenue spending picked up since July 2023 and the spending is more than it was in the comparable first half of FY23.

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs4.84 trillion was paid out as of September 2023. Among the other major items of revenue spending in the year were food subsidies, fertilizer subsidies, defence maintenance and social security payments towards pensions and government salaries. Many of them tend to be fairly sticky.

   

• Capital spending for the full year FY24 is targeted at Rs10.00 trillion of which the government has achieved capex of Rs4.91 trillion in H1-FY24 or 49% of full year budget. The capex budget grew 50% over last year, and the government has already committed that it would not relent on the capex quantum, due to its strong externalities.

To sum up the spending story, despite the constraints and global headwinds, the government has not allowed its budgeted capex commitments to get affected. That is the big story. Whether subsidies and elections put pressure on spending remains to be seen.

How the troika of deficits are evolving in FY24

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows fall short of the revenue spending. That is like borrowing for your morning breakfast; but that is the way it is. The bigger challenge is reining in the fiscal deficit as it also has debt implications, since the fiscal gap is met by borrowings. Here is a quick look at the 3 most critical deficits.

• The fiscal deficit (budget deficit) for the full year FY24 has been pegged at Rs17.87 trillion and as of the end of September 2023, the fiscal deficit for the year stands at Rs7.02 trillion or 39.3% of full year target. The frenetic growth in fiscal deficit between May and July has shifted to a more gradual growth in the last 2 months.

   

• Annual revenue deficit target is Rs8.70 trillion for FY24. As of the end of September 2023, the revenue deficit stood at Rs2.31 trillion or 26.6% of full year target. That means, there has been a revenue surplus in September 2023; just like in August 2023. The revenue deficit to fiscal deficit ratio has fallen from 49.90% in July 2023 to 44.25% in August 2023 and further to 32.97% in September 2023. Last 2 months have been a blessing in disguise for central government finances as the extent of using borrowings for revenue spending has come down sharply.

   

• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That is targeted for FY24 at Rs7.07 trillion, and stands at Rs2.18 trillion as of the close of September 2023 or 30.8% of full year target. With rates coming down, September 2023 marked the second month of primary account surplus.

To sum it up, the fiscal deficit, revenue deficit and the primary deficit are on target, but the good news is the positive tidings on revenue deficit and primary deficit in August and September 2023. It remains to be seen how effectively the government can contain central fiscal deficit (CFD) under 5.9% for FY24; although borrowings calendar indicate it can.

How was FY24 fiscal deficit funded up to September 2023

Out of the total fiscal deficit target of Rs17.87 trillion for FY24, India has touched fiscal deficit of Rs7.02 trillion (39.3%) as of the end of H1-FY24. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the Rs7.02 trillion fiscal deficit till the end of September 2023; domestic financing accounted for the bulk of Rs6.95 trillion while international financing was the residual amount. 

Out of the Rs6.95 trillion of domestic financing, market borrowings accounted for just about Rs3.69 trillion. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes; which contributed close to Rs2.61 trillion in the first half. Prima facie, the fiscal deficit target of 5.9% of GDP is increasingly looking achievable for the current fiscal year also. The question is what it means for the fiscal deficit target in FY24. For that, we may have to wait for the Union Budget.