Fiscal deficit picks up to 17.2% of full year target as of July 2024

2 Sep 2024 , 03:00 PM

FISCAL DEFICIT PROGRESSES GRADUALLY IN JULY 2024

Last month, the discussion was all about the full budget presented by the government on July 23, 2024. The big standout talking point in the full budget was the reduction in the fiscal deficit target further by 20 bps to 4.9% of GDP for FY25. Considering that the reduced target was bettered last year, and the government having a robust inflow of ₹2.11 Trillion from the RBI dividend, the 4.9% fiscal deficit target looks eminently achievable. In the full budget, the government already knew about the bumper dividend payout by the RBI. The call it had to take was whether it should allocate the bumper RBI dividend for fiscal control, enhancing capex growth, or a combination of both. Between FY24 and FY25, the fiscal deficit has move sharply lower from 5.9% of GDP to 4.9% of GDP. In terms of monthly show, the July monthly fiscal deficit accretion was sharply higher at ₹1.41 Trillion compared to just ₹85,097 Crore in June 2024. The cumulative fiscal deficit as of the end of July 2024 stands at ₹2.77 Trillion, which is 17.2% of the full year fiscal deficit target for the year. The table below captures the government receipts, expenditures, and the fiscal deficit as of July 2024 end in detail.

Item Heads	Budget Estimate FY25 (₹ in Crore)	Actuals up to July 2024 (₹ in Crore)	Actuals to Target (% achieved)	Same Period Last Year
Revenue Receipts	31,29,200	10,17,020	32.50%	28.90%
Tax Revenue (Net)	25,83,499	7,15,224	27.70%	25.00%
Non-Tax Revenue	5,45,701	3,01,796	55.30%	59.30%
Non-Debt Capital Receipts	78,000	6,386	8.20%	16.30%
Recover of Loans	28,000	6,381	22.80%	35.90%
Other Receipts	50,000	5	0.00%	9.00%
Total Receipts	32,07,200	10,23,406	31.90%	28.50%
Revenue Expenditure	37,09,401	10,39,091	28.00%	30.40%
of which Interest	11,62,940	3,27,887	28.20%	27.80%
Capital Expenditure	11,11,111	2,61,260	23.50%	31.70%
Total Expenditure	48,20,512	13,00,351	27.00%	30.70%
Fiscal Deficit	16,13,312	2,76,945	17.20%	33.90%
Revenue Deficit	5,80,201	22,071	3.80%	34.70%
Primary Deficit	4,50,372	-50,942	-11.30%	43.20%

Data Source: Controller General of Accounts (CGA)

As of the close of June 2024, the fiscal deficit stood at 8.1% of the full year GDP. However, that is more because the entire RBI dividend of ₹2.11 Trillion was booked in the month of May 2024 itself. There is one important thing to remember here. While calculating the fiscal deficit percentage for June 2024, the CGA had considered the old fiscal deficit number of ₹16.85 Trillion. However, in the current month, the CGA has used the revised fiscal deficit full target of ₹16.13 Trillion for FY25. However, considering that the rating agencies appear favourably disposed towards India, one can undermine the importance of aggressively cutting down on the fiscal deficit. In terms of global investors’ confidence, it seems be working just perfectly fine.

IS THE GOVERNMENT SENDING THE RIGHT FISCAL MESSAGE?

For the fiscal year FY25, the full budget has cut the fiscal deficit target further by 20 bps from 5.1% to 4.9%. Effectively, the fiscal deficit is 100 bps down in last 1 year and the finance minister has promised to take the fiscal deficit to below 4.5% by end of FY26. That does not look to be a very tough call now.

• The persistent lower of the fiscal deficit is a clear message that the government is obsessed about reducing the fiscal deficit. For FY25, revenues are robust for the Indian economy on the back of strong GDP growth. Also, the government is going slow on revenue spending and has cut down on capital spending to bring down fiscal deficit.
  
• In the full budget on Jul 23, 2024, the government had a choice between boost capex and cutting fiscal deficit. The government opted for the latter, where the fiscal deficit is proposed to be curtailed at 4.9% for FY25, despite the ₹3.85 Trillion subsidy bill. Despite that, the reduction in fiscal deficit to 4.9% of GDP is commendable.
  
• In difficult markets, the foreign investors favour the economies that are fiscally prudent. With the aggression shown by the Indian economy in curtailing fiscal deficit to the original FRBM levels by FY26, it is a strong and unambiguous message to global investors that the government would, given a choice, put fiscal prudence above all else.
  
• Containment of fiscal deficit is also a strong signal on two fronts. Firstly, it is a signal that the private sector will not be crowded out of the bond markets due to the aggressive borrowing program of the central government. It is also a signal that when the RBI gets down to rate cuts, as and when the time is ripe, the macro policy of the government would be in perfect sync, from a fiscal policy point of view.
  
• Contained fiscal deficit is also an indication that there are no macro risks to the currency in the near future and that should prevent any run on the Indian rupee or persistent weakening. Sustained high fiscal deficit normally hits the domestic currency the hardest and with the rupee already on the threshold of ₹84/$, this sends the right message.

The government has given a positively proactive message by cutting the fiscal deficit by a full 100 bps in last one year; making the best of the robust revenue flows.

STORY OF GOVERNMENT REVENUES UPTO JULY 2024

The FY24 fiscal deficit was eventually contained at 5.6%, which is a good 30 bps lower than the original estimate and 20 bps lower than the revised estimate. For FY25, the interim budget presented in February 2024 had projected fiscal deficit at 5.1% of GDP for FY25. However, after the bumper dividend paid out by the RBI, the fiscal deficit target for FY24 has been further scaled down by 20 bps from 5.1% to 4.9%. One point to note here is that all the number we discuss here are based on the full budget numbers, unlike the interim budget being used in the June 2024 analysis last month.

• Against the sharply enhanced full year total receipts target of ₹32.07 Trillion, the central government has already achieved ₹10.23 Trillion of total receipts as of the end of July 2024. That is, 31.9% of full year revenue target for FY25, which is higher than the similar period in FY24. However, this is largely due to RBI dividend being accounted in May 2024; front-ending the revenue flow substantially. That is likely to moderate ahead.
  
• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. For FY25, the government has reduced its target for net tax revenues from ₹26.02 Trillion to ₹25.83 Trillion. This net tax revenues is net of devolvement and refund. For FY25, till the end of July 2024, the government has achieved net tax revenues of ₹7.15 Trillion, showing 27.7% target achieved. This figure is higher compared to the corresponding FY24 figure, but this could change as it is due to the refund delays.
  
• 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 has been further hiked from ₹4.00 Trillion in the interim budget to ₹5.46 Trillion in the full budget. Out of this, the centre has achieved ₹3.02 Trillion (55.3% of full year target) as of the end of July 2024. There is a sharp spike in net receipts from economic services at ₹1.82 Trillion. This is separate from the RBI dividend of ₹2.11 Trillion being accounted in May 2024, which is shown separately under the header of dividends and profits. These are the higher non-tax revenue receipts in FY25, which has been estimated at a record high.
  
• 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. The achieved percentage may not be too relevant since disinvestments have not yet started in full earnest. However, the divestment target is just ₹50,000 Crore for FY25, in full budget, although in previous years, the government even struggled to meet that.

The flow of government tax revenues in FY25 is likely to be higher than in FY24. However, the interesting part of the story is that this surge in revenue will not be driven by tax receipts but by a huge surge in non-tax receipts from dividends, profits, interest, and net economic services.

STORY OF GOVERNMENT SPENDING UPTO JULY 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 as of the end of July 2024.

• Total expenditure, comprising of revenue expenditure and capital expenditure, where the target has been enhanced from ₹47.66 Trillion to ₹48.21 Trillion for the full year FY25. As of the end of July 2024, the total expenditure stood at ₹13.00 Trillion, or 27.0% of full year target. In FY25, the spending is lower than the corresponding year-ago expenditure in FY24.
  
• Revenue expenditure, in the full budget has been revised upwards from ₹36.55 Trillion to ₹37.09 Trillion. Till the close of July of FY25, there has been actual spending to the tune of ₹10.39 Trillion. That is 28.0% of full year target; which is lower than the corresponding figure of the previous fiscal year.
  
• Out of the revenue spending, interest payment target for FY25 has been lowered from ₹11.90 Trillion to ₹11.63 Trillion. As of the close of July 2024, a sum of ₹3.28 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.
  
• Capital spending for the full year FY25 has been kept static as in the interim budget at a modest ₹11.11 Trillion of which the government has achieved capex of ₹2.61 Trillion as of July 2024 or 23.5% of full year budget. 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, and the government has decided not to use the RBI dividend to boost capex. However, the lag effect of past capex could still have a positive impact for some time.

Clearly, the government is expecting a lot more of capex initiative now coming 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 has run a revenue deficit as well as a fiscal deficit. Fiscal deficit had crossed 9% of GDP in FY21 amidst aggressive pandemic spending, but in the last three years, the move towards normalization has shown a sense of urgency. Here is a quick look at the 3 critical deficits in FY25.

• The fiscal deficit (budget deficit) for FY25 has been revised lower from ₹16.85 Trillion ₹16.13 Trillion. In the current update, the CGA has used the data pertaining to the full budget, so all the deficit data is now fully reflective of the current picture. Till the end of July 2024, the fiscal deficit achieved is 17.2% of the full year deficit, so still there is still a lot of leeway for the government.
  
• Revenue deficit target for FY25 has also been reduced further in the full budget from ₹6.53 Trillion to ₹5.80 Trillion. Remember, revenue deficit is a bit like borrowing for your morning breakfast. As of the end of July 2024, the revenue deficit stood at ₹22,071 Crore; after being in Revenue Surplus as of the end of June. However, this surplus was due to the RBI dividend of ₹2.11 Trillion being front loaded.
  
• 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 July 2024, the 4-month cumulative ratio of revenue deficit to fiscal deficit stands at 7.97%. However, this is due to adjustments and not much should be read into this.
  
• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That target has been lowered for FY25 from ₹4.95 Trillion in the interim budget to ₹4.50 Trillion. This continues to be in surplus as of July 2024 due to the RBI dividend payout.

HOW FY25 FISCAL DEFICIT WAS FUNDED AS OF JULY 2024

The fiscal deficit or the budget deficit is a gap that has to be filled up. It is typically filled up by 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 ₹2.77 Trillion (1752%) as of July 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). However, with the fiscal deficit amount for FY25 reducing from ₹16.85 Trillion to ₹16.13 Trillion in the full budget, the market borrowing target of the central government has also fallen sharply. That is the good fiscal news!