Fiscal Deficit at 55% of FY24 target after 9 months

2 Feb 2024 , 10:28 AM

Fiscal deficit concerns for FY24 were largely overblown

The fiscal deficit data, along with the statement of government accounts for the first nine months of FY24 up to December 2023 was published by the Controller General of Accounts (CGA) on the last working day of January 2024. 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 2023 as the government spent heavily to contain food inflation and paid out the higher minimum support prices (MSP) committed. 

However, the growth in fiscal deficit has tapered in the 5 months since August 2023 and the growth as the government has been conscious about the fiscal deficit spilling over. Fiscal deficit as a percentage of full year target rose 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% while as of December 2023 close, the fiscal deficit has just moved up from 50.7% to 55.0% of the full year fiscal deficit target. The good thing is that this has happened without compromising on capital spending. Of course, the government has gone slow on revenue spending, but that is par for the course.

Real challenge was the fiscal deficit glide path

When the government had announced the fiscal deficit at 5.9% of GDP for FY24, most of the analysts and economists were sceptical about the aggression. However, as of December 2023, it does look like the fiscal deficit for the full year can be easily defended. Of course, the tax buoyancy has also helped the fiscal deficit stay under control and that has more than made up for the weak flows from inflation. But the real struggle is managing the glide path. The government had allowed fiscal deficit to spike during the COVID, and that had to end.

The expected glide path ahead of the FY24-25 Union Budget was that the government would cut the fiscal deficit to 5.5% of GDP and in an aggressive scenario it would push it down to 5.3% of GDP. That would be in tandem with the eventual goal of 4.5% fiscal deficit to GDP by FY26. However, the concern was that the Red Sea crisis and the higher subsidies may result in the fiscal deficit for FY24 worsening to 6.0% against the original target of 5.9%. In reality, the Budget announcement came as a whiff of fresh air.

How Union Budget 2024-25 changed the rules of the game

Numerically, the fiscal deficit situation was considered to be comfortable. For example, at the end of December 2023, the central fiscal deficit (CFD) has only traversed 55% of its full year target. Last year, at the same time, it had traversed nearly 60% of the full year deficit. Fiscal deficit, in any year, tends to be back-ended. That has been the experience in the last few years. However, the latest Union Budget changed the rules of the game totally.

• The finance minister, despite only announcing the interim budget, went ahead and promised the current year fiscal deficit would be reduced from 5.9% to 5.8% of GDP. That was clearly a lot better than expected. It came about on the back of robust dividends from PSU banks and other PSU companies. In addition, the tax buoyancy was at 1.4X against the expectation of 1.2X, and that made all the difference to the overall tax collections, which have been at record levels in FY24 so far.

   

• But the big news in the Union Budget was that the Fiscal Deficit target for FY25 has been cut sharply to 5.1%. that sharply lower than the most optimistic estimate of 5.3% for the full year fiscal deficit and that means, the government is entirely on track to achieve the fiscal deficit target of 4.5% by FY26. In fact, Nirmala Sitharaman  has also expressed confidence that FY26 fiscal deficit could even trend below 4.5%.

   

• The real good news is that this fiscal deficit containment has been achieved without compromising on capex in the coming year. For FY25, the government has announced capex of Rs11.11 trillion, which is around 11.1% higher than FY24. One can argue that the 30% growth of capex growth has not been maintained, but we must make some provision for the law of large numbers. Also, the capex spending normally has a lag effect that sustains for 3-4 years, so in FY25 we are going to see the cumulative impact of the enhanced capex for the last 3 years. That should make a positive difference.

For the government, the last quarter may still be challenging due to the global Red Sea turmoil. However, with a big focus on domestic demand and domestic markets, the Indian economy and the fiscal deficit may be largely hedged from the global risks.

How government revenues panned out as of end December 2023

With data up to the end of December 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 receipts target of Rs27.16 trillion, the central government has already achieved Rs20.72 trillion of revenues as of the end of December2023. That is, 76.3% 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 Rs17.30 trillion as of the end of December 2023, showing 74.2% target achieved. This figure is lower than the corresponding FY23 figure, but that is more because the revenue estimates are more aggressive and back-ended in FY24.

   

• 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 Rs3.13 trillion (103.5%) as of end of December 2023. This percentage looks high since it includes Rs87,416 crore bumper dividend paid to the government by RBI for FY23. However, this could improve as PSU dividends are sharply higher this fiscal.

   

• On the subject of non-debt capital receipts, the government had set a target of Rs84,000 crore and has achieved 35.3% 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; and tax buoyancy may be one of them.

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

How government spending looks like as of December 2023?

India has traditionally run a deficit; at a fiscal level and at revenue level as spending has always exceeded receipts. That gap was filled by borrowings (fiscal deficit). Here is how government spending for FY24 looked as of the end of December 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 December 2023, the total expenditure stood at Rs30.54 trillion, or 67.8% 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 Rs23.81 trillion as of the end of December 2023. That is 68% of full year target. The government has taken pains to keep revenue spending in check, as there is less growth disruptive than cutting down on capital expenditure.

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs7.48 trillion was paid out as of December 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 Rs6.74 trillion as of December 2023 or 67.3% 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. For FY25, the capex is higher by about 11.1% over FY24.

Despite the constraints and global headwinds, the government has not allowed capex commitments to slow down in any way. The strategy of not compromising on capex commitments is what is making the growth story sustainable.

Tale of 3 deficits: Fiscal, Revenue and Primary

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows fall short of the revenue spending. The bigger challenge is reining in the fiscal deficit (Budget Deficit) as it also has debt and interest rate 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 December 2023, the fiscal deficit for the year stands at Rs9.82 trillion or 55% of full year target. The frenetic accretion to fiscal deficit between May and July has shifted to a more gradual growth; as revenue spending is slowing.

   

• Revenue deficit (borrowing for breakfast) target is Rs8.70 trillion for FY24. As of the end of December 2023, the revenue deficit stood at Rs3.38 trillion or 38.9% of full year target. That means, like in August and September 2023, even December has been a month of revenue surplus. 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; but has again fallen to 34.44% of fiscal deficit in December 2023 due to the revenue surplus.

   

• 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 Rs2.34 trillion as of the close of December 2023 or 33.1% of full year target. 

To sum up, the fiscal deficit, revenue deficit and the primary deficit are on target as of December 2023 and the revenue surplus has helped. It is not surprising that the FM has cut central fiscal deficit (CFD) target to 5.8% for FY24 and 5.1% for FY25. 

How FY24 fiscal deficit was funded up to December 2023

Out of the total fiscal deficit target of Rs17.87 trillion for FY24, India has touched fiscal deficit of Rs9.82 trillion (55%) as of the end of December 2023. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the Rs9.82 trillion fiscal deficit till the end of December 2023; domestic financing accounted for the bulk (97.05%) at Rs9.53 trillion while international financing and investment redemptions made up the residual amount. 

Out of the Rs9.53 trillion of domestic financing, market borrowings accounted for the biggest chunk of 93.7%. 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 for FY24 has already been cut to 5.8% and for FY25, the fiscal deficit target has been set at an aggressive level of 5.1% in the Interim Budget. It now remains to be seen; what happens in the General Elections 2024.