Fiscal Deficit at 50.7% of FY24 target after eight months

31 Dec 2023 , 08:15 AM

FY24 Fiscal deficit remains subdued at the end of 8 months

The fiscal deficit data, along with the statement of government accounts for the first eight months of FY24 up to November 2023 was published by the Controller General of Accounts (CGA) on the last working day of December. This data is normally published with a lag of one month. It may be recollected that the fiscal deficit had shown a rapid increase in June and July as the government spent heavily to contain food inflation and paid out the higher minimum support prices (MSP) committed. 

However, the good news is that the growth in fiscal deficit has tapered in the 4 months since August 2023 and the growth has slowed down. Fiscal deficit as a percentage of full year target has just risen from 33.9% to 36% in August 2023; 36% to 39.3% in September 2023 and from 39.3% to 45% in October 2023. In November, the fiscal deficit has risen from 45% to 50.7% of the full year fiscal deficit target. The upcoming general elections may be a challenging time, but as this government has shown in the past, spending has to be a continuous process and not just around the time of elections. 

Now, the deficit target of 5.9% for FY24 looks quite realistic?

In FY23, the central fiscal deficit (CFD) was pegged in the Union Budget 2022-23 at 6.4% of GDP. However, the actual fiscal deficit for FY23 was slightly lower at 6.32% of GDP; which is appreciable considering that the government had to overspend to contain inflation, while disinvestment flows had disappointed. However, this was compensated by a surge in direct and indirect tax revenues. That had encouraged the Finance Ministry to set a more ambitious target of 5.9% for FY24. For now, that looks eminently achievable, but it does assume robust direct and indirect tax revenues, with subsidies under check. 

The positives this year are the buoyant revenues, and higher than expected RBI dividend. However, risks arise from lower nominal GDP growth, weak disinvestment revenues and the risk of higher food subsidies. Government maintained its borrowing target at Rs6.55 trillion for the H2-FY24, which signals that full year fiscal deficit has no surprises in store. While there are risks to fiscal deficit, it looks unlikely that it may really shoot beyond 5.9%. 

What are the fiscal deficit risk factors in FY24?

Numerically, the fiscal deficit situation is comfortable. For example, at the end of November, the central fiscal deficit (CFD) has only traversed 50.7% of its full year target. Last year, at the same time, it had traversed more than 58% of the full year deficit. Fiscal deficit, in any year, tends to be back-ended. That has been the experience in India in last few years. Here are some risks to the assumption that defending the 5.9% fiscal deficit target should be a cakewalk. It may be eventually achievable, but it surely will not be a cakewalk.

• The revenues from taxes are still strong, both on the direct taxes and the indirect taxes front. However, such robustness of FY24 is coming from better compliance and the expansion of the tax base, and not from higher economic activity. That is evident from the tepid nominal growth in GDP as compared to last year. Most of the real GDP gains benefits have come from lower inflation than from higher nominal growth. Also, the higher capex was kept in check with controls over revenue spending. This year, we have seen capex spending going ahead of target and the disinvestment revenues once again likely to disappoint. RBI dividend was generous, but that is hardly sustainable.

   

• The disinvestment revenues are sharply lower this year and with the IDBI Bank divestment and the BPCL divestment being put off for now, there are no big ticket sell-offs for the government this fiscal. To an extent, the higher RBI dividend has offset the weak divestment revenues, but it is not yet clear how much the government will earn from the proposed monetization of key infrastructure assets.

   

• While domestic growth is still strong, the export driven global growth is faltering; in goods and services. That is likely to have an impact on tax flows in this year and it is feared that things could get just about tighter in the second half of FY24. However, the hope is that with US GDP robust and Fed likely to start cutting rates, the growth may not remain a challenge any longer.

   

• What markets are worried is about negative surprises on the subsidy front. Fertilizer subsidies may be lower, but the extension of the free food program and oil subsidies could be a challenge. With a weak Kharif and Rabi getting delayed, farm subsidies are also likely to push the limits this year.

For the government, the second half could be a lot more testing. More than the elections, it would be the back-ending of subsidy costs that would really be an area of concern.

How government revenues panned out as of end November 2023

With data up to the end of November 2023 available, we have an evolving picture of how the revenues panned out in FY24 against annual 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 already achieved Rs17.46 trillion of revenues as of the end of November 2023. That is, 64.3 of full year revenue target, which is slightly better than the similar 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 Rs14.36 trillion as of the end of November 2023, showing 61.6% target achieved. This figure appears to be plateauing in the last couple of months and remains an area of concern..

   

• 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 Rs2.84 trillion (88.1%) as of end of November 2023. This percentage looks high since it includes Rs87,416 crore bumper dividend paid to the government by RBI for FY23. This is more like an exceptional item.

   

• On the subject of non-debt capital receipts, the government had set a target of Rs84,000 crore and has achieved 30.3% of the target. This will only pick up momentum once the divestments and the strategic sales pick up; where visibility is still low. This segment may have to be compensated by other heads in FY24.

To sum it up, the government flow of government tax revenues in FY24 is at par with the comparable period in FY23. However, benefits will be seen in the form of the lag effect of capex. However, lower nominal GDP growth remains a challenge for government revenues.

How government spending looks like as of November 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 how government spending for FY24 looked as of the end of November 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 November 2023, the total expenditure stood at Rs26.52 trillion, or 58.9% of full year target. In FY24, the spending is lower than comparable period in FY23.

   

• Revenue expenditure, which is targeted at Rs35.03 trillion for FY24 has seen actual spending to the tune of Rs20.67 trillion as of the end of November 2023. That is 59% of full year target. The government has taken pains to keep revenue spending in check but such revenue spending is likely to pick up steam in last quarter of FY24.

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs6.08 trillion was paid out as of November 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. 

   

• Capital spending for the full year FY24 is targeted at Rs10.00 trillion of which the government has achieved capex of Rs5.86 trillion as of November 2023 or 58.5% of full year budget. The capex budget grew 50% over last year, and the impact of the higher capital spends is visible in core sector numbers and order books of capital goods companies. However, the pace of growth has slowed in recent months.

Despite the constraints and global headwinds, the government has not allowed capex commitments to be curtailed in any way. The strategy of not compromising on capex commitments by the central government is rather appreciable.

Tale of 3 deficits: Fiscal, Revenue and Primary

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows are short of the revenue spending. The bigger challenge is reining in the fiscal deficit as it also has borrowing 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 November 2023, the fiscal deficit for the year stands at Rs9.07 trillion or 50.7% of full year target. The frenetic accretion to fiscal deficit between May and July has shifted to a more gradual growth; with share much lower than in FY23.

   

• Annual revenue deficit target is Rs8.70 trillion for FY24. As of the end of November 2023, the revenue deficit stood at Rs3.46 trillion or 39.8% of full year target. That means, there has been a return to revenue deficits in November after recording surpluses in August and September 2023. 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. It rose marginally to 34.81% in October 2023 and further to 38.21% in November 2023. Clearly, the deficits are picking up steam in the second half of FY24.

   

• 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 Rs2.99 trillion as of the close of November 2023 or 42.2% of full year target. 

To sum up, the fiscal deficit, revenue deficit and the primary deficit are on target as of November 2023 and negative surprise are not expected for now. It remains to be seen how effectively the government can contain central fiscal deficit (CFD) under 5.9% for FY24. For now, H2 borrowing calendar indicates that government is well and truly on target.

How FY24 fiscal deficit was funded up to October 2023

Out of the total fiscal deficit target of Rs17.87 trillion for FY24, India has touched fiscal deficit of Rs9.07 trillion (50.7%) as of the end of November 2023. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the Rs9.07 trillion fiscal deficit till the end of November 2023; domestic financing accounted for the bulk (98.8%) at Rs8.96 trillion while international financing was the residual amount. 

Out of the Rs8.96 trillion of domestic financing, market borrowings accounted for the biggest chunk of 90.5%. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. The fiscal deficit target of 5.9% of GDP is looking perfectly achievable for the current fiscal year FY24, in the absence of nasty macro surprises. In the next few months, all eyes will be on the Union Budget 2024 and the election to form the next central government.