Fiscal Deficit at 86.5% of FY24 target with 1 month to go

31 Mar 2024 , 10:16 AM

FISCAL DEFICIT PICKS UP, BUT STILL WITHIN TARGET

On the last working day of March 2024, the Controller General of Accounts (CGA) released the fiscal deficit update as of the end of February 2024. At the end of 10 months the fiscal deficit had stood at 63.6% of full year target and it has grown to 86.5% of full year target at the end of 11 months of FY24. That means, the full year target of 100% should be respected and that means, the government will stabilize its fiscal deficit at 5.8% of GDP. That should be value accretive for the Indian rupee and also for external ratings.

It is not just the current fiscal deficit to GDP ratio that was cut in the interim budget presented on February 01, 2024. Even the fiscal deficit for FY25 was pegged sharply lower than expectations at 5.1% of GDP while the long term fiscal deficit was pegged meaningfully below 4.5% for FY26. India appears to have managed a phased reduction in its fiscal deficit to GDP ratio, as committed at the time of the 2021 Union Budget. While revenues have been robust, the positive takeaway is that the cuts have happened on revenue spending but not so much on capital spending, which will now keep the growth engine robust.

HOW THE FISCAL DEFICIT STORY EVOLVED IN FY24

The growth in fiscal deficit had slowed in the last 6 months since August 2023 as the centre has been wary of the fiscal deficit spilling over. However, a lot of spending gaps have been filled up in February as the fiscal deficit has surged sharply in February 2024. Here is a quick retrospect on the fiscal deficit narrative since August 2023. 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. That was the phase, when the CFD grew slowly.

In November, the fiscal deficit increased from 45% to 50.7% while as in December 2023, the fiscal deficit moved up from 50.7% to 55.0% of full year fiscal deficit target. January 2024 saw fiscal deficit picking up from 55.0% to 63.6%, while February saw a sharp spike in fiscal deficit from 63.6% to 86.5%. However, that was on the cards with most outlays being back-ended for FY24. This still means that India can meet the revised full year fiscal deficit target of 5.8% for FY24 (based on the interim budget revision). That is surely good news.

H1-FY24 BORROWING CALENDAR GIVES ROOM FOR FISCAL OPTIMISM

On March 27, 2024, the government put out its elaborate borrowing calendar for the first half of FY25, up to September 2024. Before we get into the micros, let us look at the total market borrowings levels. The H1-FY24 borrowing target of ₹7.50 Trillion is nearly 53.1% of the full year borrowing target of ₹14.13 Trillion. However, this borrowing target of ₹14.13 Trillion for FY24 itself is lower than the borrowing targets of the last 2 years. For instance, in FY23, the borrowing target was ₹14.21 Trillion while for FY24 it was ₹15.43 Trillion. This is a clear indication that the government intends to keep the fiscal deficit in check. Here are some key takeaways from the H1-FY24 borrowing numbers.

1. The year FY25 has seen the introduction of the 15-year bonds for the first time in India based on popular demand. The borrowing program has a complete range from 3 years at the lower end up to 50-year bonds at the upper end. This program only includes dated securities and not treasury bill borrowings.
2. The borrowing of ₹7.50 Trillion in the first half of FY25 will be done across a total of 26 tranches with individual tranche values ranging from ₹20,000 Crore on the lower side to ₹38,000 Crore on the upper side. The average size per tranche would be about ₹28,850 Crore. This will include green bond issues of ₹12,000 Crore.
3. The borrowings in the first half are also lower than the corresponding periods of FY23 and FY24. That can be largely due to the general elections in April and May this year, during which period, the government borrowings program tends to slow down.
4. The overall impact would be positive for the bond markets, since there will not be crowding out of private bonds in the market also. Also, with a more restrained borrowing program, the fiscal FY25 is likely to see bond yields also under check. Economists expect that prudent borrowings may lead to the bond yields on the 10-year easing to a level of 6.8% to 7.0% in the first half of FY25.

Above all, this is a signal that the government is dead serious about reining in in its fiscal deficit on a war footing.

STORY OF GOVERNMENT REVENUES AS OF FEBRUARY 2024

With data up to the end of February 2024 (11 months of FY24) available, we have an evolving picture of how revenues panned out in FY24 against annual targets. Revenue flows in FY24 are seeing good traction. Here are some key data points.

• Against the enhanced full year total receipts target of ₹27.56 Trillion, the central government has already achieved ₹22.46 Trillion of revenues as of the end of February 2024. That is, 81.5% of full year revenue target, which is marginally lower when compared with the similar period in FY23. Revenues have slowed in February 2024.
• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the slightly reduced full year target for net tax revenues (net of refunds and devolvement) at ₹23.24 Trillion, the government has achieved net tax revenues of ₹18.49 Trillion as of the end of February 2024, showing 79.6% target achieved. This figure is sharply lower compared to the corresponding FY23 figure.
• 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 sharply hiked at ₹3.76 Trillion of which the centre achieved ₹3.60 Trillion (95.9%) as of end of February 2024. The sharp revenue upgrades on this front are largely from the better than expected revenues from monetization of assets like roads and mines in the current fiscal. This is covered under the header of Economic Services.
• On the subject of non-debt capital receipts, the government reduced the target to ₹56,000 Crore due to tepid performance on the disinvestment front. It has achieved 64.5% of the target and is likely to fall short like last year. However, this has been largely compensated by the better than expected non-tax revenues this year.

To sum it up, the flow of government tax revenues in FY24 is lower than the comparable period in FY23. While disinvestments disappointed, the monetization of assets like mines and roads made up for it. Expect a surge in revenue reporting in March 2024.

STORY OF GOVERNMENT SPENDING AS OF FEBRUARY 2024

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 February 2024.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at a reduced ₹44.90 Trillion for the full year FY24. As of the end of February 2024, the total expenditure stood at ₹37.47 Trillion, or 83.4% of full year target. In FY24, the spending is at par with the corresponding year-ago expenditure.
• Revenue expenditure, which is targeted at a higher ₹35.41 Trillion for FY24 has seen actual spending to the tune of ₹29.42 Trillion as of the end of February 2024. That is 83.1% of full year target. That is slightly lower than comparable period last year.
• Out of the revenue spending, interest payment target for FY24 stands at a lower ₹10.55 Trillion of which ₹8.81 Trillion was paid out as of February 2024. 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 a slightly lower ₹9.50 Trillion of which the government has achieved capex of ₹8.06 Trillion as of February 2024 or 84.8% of full year budget. With the base being reduced for FY24, the actual growth in FY25 should be higher than the budgeted 11.1% for capex.

The government has not allowed capex commitments to slow down, despite pressure on reining in fiscal deficit. The strategy of not compromising on capex commitments is what makes the India growth story sustainable. That is evident from the fact that India has emerged as the only large economy globally to grow at over 7% for 3 years in a row.

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. The fiscal deficit is funded through the government borrowing program. Here is a quick dekko at the 3 most critical deficits.

• The fiscal deficit (budget deficit) for the full year FY24 has been now revised lower to ₹17.35 Trillion and as of the end of February 2024, the fiscal deficit for the year stands at ₹15.01 Trillion or 86.5% of full year target. The frenetic accretion to fiscal deficit between January and February is more due to year-end reporting, and is along expected lines. The government has also marginally cut down on the capex, even as inflows have remained robust. That has kept the fiscal deficit in check for the year.
• Revenue deficit target is also revised lower to ₹8.41 Trillion for FY24. As of the end of February 2024, the revenue deficit stood at ₹7.32 Trillion or 87.0% of full year target. The critical ratio of Revenue deficit to fiscal deficit ratio had 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. As of the close of January 2024, the revenue deficit as a share of fiscal deficit stood at 37.70%. For February, the ratio has surged to 48.75%, in line with the FY24 targets.
• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That target has been lowered for FY24 to ₹6.79 Trillion, and stands at ₹6.21 Trillion as of the close of February 2024 or 91.3% of full year target.

To sum up, the fiscal deficit, revenue deficit and the primary deficit are on target as of February 2024 and the revenue deficit target looks all set to be reined in at 2.83% of GDP.

HOW FY24 FISCAL DEFICIT WAS FUNDED UP TO END FEBRUARY 2024

Out of the total fiscal deficit target of ₹17.35 Trillion for FY24, India has touched fiscal deficit of ₹15.01 Trillion (86.5%) as of the end of February 2024. The challenge with fiscal deficit is that it has to be funded (with borrowings) so the budget is balanced. Out of the ₹15.01 Trillion fiscal deficit till the end of February 2024; domestic financing accounted for the bulk (97.6%) at ₹14.65 Trillion while international financing and investment redemptions made up the residual amount.

Out of the ₹14.65 Trillion of domestic financing, market borrowings accounted for the biggest chunk of 87.17%. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. The revised fiscal deficit target of 5.8% for FY24 looks to be within reach, while the real area of interest will be whether India can manage 5.1% in FY25. That would be icing on the cake for the India growth story.