Fiscal deficit inches up to 29.4% of full year target as of September 2024

31 Oct 2024 , 09:35 AM

FISCAL DEFICIT INCHES UP IN SEPTEMBER 2024

The month of October 2024 has been tumultuous, to say the least. The month has already seen over ₹1 Trillion of FPI selling in equities and the geopolitical risk has only continued to escalate. Iran and Israel may not be in the midst of an all-out war, but it does not look anything more dignified either. India has been experiencing contraction in core sector output and in IIP and that is being largely attributed to the slowdown in capex spending by the government and also to the constraints imposed by the trade disruptions in the Red Sea. In this background, the fiscal deficit as a share of full year FY25 targets has inched up from 27.0% of GDP at the end of August 2024 to 29.4% of GDP at the end of September 2024.

The quick impression that one gets by looking at the progress of fiscal deficit is that the government is playing it conservative in FY25. That is understandable in the light of the uncertainties that the global economy faces. To be fair, there were expectations that the government would use the mega RBI dividend of ₹2.11 Trillion to boost capex spending, but that was not the case. Government has its hands full in terms of higher DA payouts to government employees & pensioners, food subsidies, defence outlays and creating a buffer to manage the global uncertainty. In the full budget presented on July 23, 2024, the centre has taken a conscious decision to prefer reining in the fiscal deficit over boosting capex.

HOW H1FY25 FISCAL DEFICIT STACKED UP?

The table below captures the government receipts, expenditures, and the fiscal deficit for H1FY25, up to September 2024 end in granular form.

Item Heads	Budget Estimate FY25 (₹ in Crore)	Actuals up to Sep 2024 (₹ in Crore)	Actuals to Target (% achieved)	Same Period Last Year
Revenue Receipts	31,29,200	16,22,373	51.8%	53.1%
Tax Revenue (Net)	25,83,499	12,65,159	49.0%	49.8%
Non-Tax Revenue	5,45,701	3,57,214	65.5%	78.5%
Non-Debt Capital Receipts	78,000	14,601	18.7%	24.0%
Recovery of Loans	28,000	11,434	40.8%	57.5%
Other Receipts	50,000	3,167	6.3%	11.4%
Total Receipts	32,07,200	16,36,974	51.0%	52.2%
Revenue Expenditure	37,09,401	16,96,528	45.7%	46.5%
of which Interest	11,62,940	5,15,010	44.3%	44.8%
Capital Expenditure	11,11,111	4,14,966	37.3%	49.0%
Total Expenditure	48,20,512	21,11,494	43.8%	47.1%
Fiscal Deficit	16,13,312	4,74,520	29.4%	39.3%
Revenue Deficit	5,80,201	74,155	12.8%	26.6%
Primary Deficit	4,50,372	(40,490)	-9.0%	30.8%

Data Source: Controller General of Accounts (CGA)

It may be noted here that the Controller General of Accounts (CGA) reports the fiscal deficit data with a lag of one month i.e., the fiscal deficit position at the end of September is reported as of the end of October. The data above is for H1FY25. The first column shows the revised budget estimates as of the full budget presented on July 23, 2024 and the second column is the actuals as of end September 2024. The third column shows the percentage of the full year target and the last column shows the comparable figure of FY24.

REALITY CHECK ON THE DEFICIT NUMBERS

While the month-end figures show a good picture of the accumulated data, the monthly flows also give a picture of the short term trend. Let us look at some of the monthly data flows for September 2024. The monthly fiscal deficit accretion in September 2024 stood higher at ₹0.39 Trillion, compared to ₹1.58 Trillion in the month of August 2024. At the same time, the revenue surplus in September 2024 stood at ₹0.69 Trillion, compared to a revenue deficit of ₹1.21 Trillion in August 2024. Even the primary account (fiscal deficit, net of interest) has shown a surplus in the month of September. The revenue surplus in September and the sharp reduction in fiscal deficit accretion in the same month can be attributed to a surge in receipts from CPSE dividends, interest on global bonds and from monetization of key mining and highway assets during the month of September 2024. It may be recollected that the interim budget presented in February 2024 had pegged fiscal deficit at ₹16.85 Trillion (5.1% of FY25 GDP). This was later reduced to ₹16.13 Trillion (4.9% of FY25 GDP) in the full budget presented on July 23, 2024.

GROWTH VERSUS FISCAL PRUDENCE – NO DILEMMA RIGHT NOW

In our previous monthly analysis of fiscal deficit, we had mentioned that the government may be in a dilemma between growth and fiscal prudence. For now, it looks like there is no such dilemma. The government has expressed its preference for fiscal prudence over growth; possibly because the government sees reining in the fiscal deficit as a priority right now. The only question is whether the economy is paying a steep price for this choice?

• When the RBI paid out a dividend bonanza of ₹2.11 Trillion to the government for the current fiscal year, the centre had 3 choices. It could enhance capex spending from the current ₹11.11 Trillion, or it could have spent more on subsidies and freebies, or it could have reduced the fiscal deficit further as a share of GDP. Ideally, it should have gone for an eclectic mix; but in the full budget, the government only opted for higher subsidies and lower fiscal deficit, while leaving capex target intact.
• One argument by market players has been that if the government had boosted capex with the surplus funds, then FPIs may not have sold ₹1 Trillion in equities in October 2024. However, that could be a specious argument. Most FPIs are still comfortable with fiscal deficit being reined in, so the government choice appears to be on track.
• Interestingly, the issue in FY25 is not just the lower capex targets, but also the lower capex usage at central and state level. For August, core sector growth and IIP had contracted, although core sector growth has bounced back into positive in September 2024. The IIP data for September 2024 will only be available by mid-November and if that is also positive, then it looks less about capex and more about the base effect.

The moral of the story is that in a tough global macro environment, the government has judiciously opted for fiscal prudence over growth. That is actually a good choice!

STORY OF GOVERNMENT REVENUES UPTO SEPTEMBER 2024

For FY25, the interim budget had projected fiscal deficit at 5.1% of GDP. However, post the bumper RBI dividend of ₹2.11 Trillion, the fiscal deficit target for FY25 has been further scaled down by 20 bps to 4.9%. if FY24 experience is anything to go by, and look at the current progression in fiscal deficit, India may end FY25 lower than 4.9% of GDP.

• Against the sharply enhanced full year total receipts target of ₹32.07 Trillion, the central government has already achieved ₹16.37 Trillion of total receipts as of the end of September 2024. That is, 51.0% of full year revenue target for FY25, which is just marginally lower than the comparable 6-month period in FY24. However, if adjusted for the RBI dividend; the revenue performance may not be all that exciting in flow terms.
• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. For FY25, the government had reduced its target for net tax revenues to ₹25.83 Trillion in the full budget. This net tax revenues is net of state devolvement and refunds. For FY25, till the end of September 2024, the government has achieved net tax revenues of ₹12.65 Trillion, showing 49.0% target achieved. This figure is flat to marginally lower compared to the corresponding FY24 figure, which shows FY25 revenues under stress.
• 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 FY25, the target for non-tax revenues had been hiked by 35% to ₹5.46 Trillion in the full budget. Out of this, the centre has achieved ₹3.57 Trillion (65.5% of full year target) as of the end of September 2024. There is a sharp spike in annual target of net receipts from economic services at ₹1.82 Trillion, which largely comprises of monetization of centre assets like mines, highways, and power transmission, of which 37% has been achieved in H1FY25. This is separate from the RBI dividend, which is classified under the header of dividends and profits. Here (thanks to the RBI dividend), nearly 87% of the full year target of ₹2.89 Trillion has already been achieved.
• On the subject of non-debt capital receipts, the government set the target at ₹78,000 Crore for FY25 due to subdued performance on the disinvestment front at just 6% as of H1FY25. This percentage may not be too relevant since disinvestments have not yet started in full earnest. The divestment target is just ₹50,000 Crore for FY25.

In FY24 and FY25, the direct and indirect tax revenues have been at record levels due to enhanced economic activity. That should hold as long as nominal GDP is not impacted.

STORY OF GOVERNMENT SPENDING UPTO SEPTEMBER 2024

Fiscal deficit arises when the expenditures exceed receipts and the gap needs to be funded. For that, we need to understand how government spending for FY25 panned out in H1FY25.

• Total expenditure, comprising of revenue expenditure and capital expenditure, had been enhanced in the full budget to ₹48.21 Trillion for FY25. As of the end of September 2024, the total expenditure stood at ₹21.11 Trillion, or 43.8% of full year target. In FY25, the spending is lower than the corresponding year-ago expenditure in FY24.
• Revenue expenditure, in the full budget had also been revised upwards from ₹36.55 Trillion to ₹37.09 Trillion. Till the close of September 2024, there has been actual spending to the tune of ₹16.97 Trillion. That is 45.7% of full year target; which is lower than the corresponding figure of the previous fiscal year at 46.5%.
• Out of the revenue spending, interest payment target for FY25 has been lowered to ₹11.63 Trillion in the full budget. As of the close of September 2024, a sum of ₹5.15 Trillion was paid out (net). 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. Subsidies alone accounted for ₹3.81 Trillion, which his dominated by food subsidy at ₹2.05 Trillion and fertilizer subsidy at ₹1.64 Trillion. The balance amount is accounted for by petroleum subsidy. Out of the total subsidy outlay of ₹3.81 Trillion for FY25, actual spending as of September 2024 has been ₹2.15 Trillion or 56% of the full year target.
• Capital spending for the full year FY25 was not changed in the full budget and retained at a modest ₹11.11 Trillion, implying 11.1% yoy growth in capex. Out of that target, the government has achieved capex of ₹4.15 Trillion as of September 2024 or 37.3% of full year budget; sharply lower than the corresponding period last fiscal. It must be noted here that the capex growth has dropped to just 11% in FY25 from a high of 30% in FY23 and FY24. Pace of capex has been slow at a central and state level in FY25.

Apparently, the government is expecting a lot more of capex initiatives to come from the private sector and the lag effect to positive influence growth.

TALE OF 3 DEFICITS: FISCAL, REVENUE AND PRIMARY

In India, the total receipts each year, not only fall short of the total expenditure, but also fall short of the revenue expenditure. Hence, India runs a revenue deficit as well as a fiscal deficit. Fiscal deficit, in the last 3 years has been brought down from above 9% to below 5%. Here is a quick look at the 3 critical deficits in FY25.

• The fiscal deficit (budget deficit) for FY25 had been revised lower to ₹16.13 Trillion in the full budget. Till the end of September 2024, the fiscal deficit achieved was 29.4% of the full year deficit, so still there is still a lot of leeway for the government. However, this includes the RBI dividend of ₹2.11 Trillion.
• Revenue deficit target for FY25 had also been reduced in the full budget from ₹6.53 Trillion to ₹5.80 Trillion. As of the end of September 2024, the revenue deficit stood at ₹0.74 Trillion or 12.8% of full year target. September also saw a revenue surplus due to sharp inflows from CPSE dividends and asset monetization.
• An important metrics is the ratio of the revenue deficit to fiscal deficit. For FY25, the target ratio of revenue deficit to fiscal deficit stands at 35.96%. As of the close of September 2024, the ratio of revenue deficit to fiscal deficit stands at 15.63%. This is, once again, an outcome of the revenue surplus in September 2024.
• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That target had been lowered for FY25 to ₹4.50 Trillion in the full budget. After briefly getting into primary deficit mode in August, it is back to a primary surplus of -0.41 Trillion as of the close of September 2024.

HOW FY25 FISCAL DEFICIT WAS FUNDED AS OF SEPTEMBER 2024

The fiscal deficit or the budget deficit is a gap that has to be funded. It is typically funded through borrowings; with the government either borrowing from the market or from the National Small Savings (NSS) account. Out of the total fiscal deficit target of ₹16.13 Trillion for FY25, India has touched fiscal deficit of ₹4.75 Trillion (29.4%) as of September 2024. For FY25, the government has set a target of raising ₹15.97 Trillion of the fiscal gap through domestic borrowings. Out of this amount, ₹11.13 Trillion will be raised via market borrowings and the balance from small savings under the (NSS). Nearly 27% market borrowing were completed till end of September 2024. However, with the fiscal deficit amount for FY25 reducing to ₹16.13 Trillion in the full budget, the H2 market borrowing target has also sobered to ₹6.61 Trillion. For now, it looks like fiscal prudence will continue to be the name of the game in FY25.