Fiscal deficit picks up to 27.0% of full year target as of August 2024

1 Oct 2024 , 05:55 PM

FISCAL DEFICIT PROGRESSES GRADUALLY IN AUGUST 2024

A lot has happened in the last 3 months in India. India completed another mega election successfully and the NDA was voted back to power for the third time in a row, albeit with a much thinner majority. India presented the full budget in July, which did disappoint the markets in terms of capex growth and capital gains taxation. However, it must be said to the credit of the government that they did manage to peg the fiscal deficit at 4.9% of GDP for FY25, nearly 20 bps lower than the interim budget targets. Of course, there were expectations that the government would use the bumper RBI dividend of ₹2.11 Trillion to boost the capex spending, but that was not the case. The government already had its hands full in terms of higher dearness allowance payouts, food subsidies, defence outlays and reduction in fiscal deficit to be able to offer anything for boosting the capex. The RBI took a calibrated call to focus on cutting fiscal deficit than on capex, which is fair game. The table below captures the government receipts, expenditures, and the fiscal deficit as of August 2024 end in granular form

Item Heads	Budget Estimate FY25 (₹ in Crore)	Actuals up to Aug 2024 (₹ in Crore)	Actuals to Target (% achieved)	Same Period Last Year
Revenue Receipts	31,29,200	12,08,312	38.6%	38.5%
Tax Revenue (Net)	25,83,499	8,73,845	33.8%	34.5%
Non-Tax Revenue	5,45,701	3,34,467	61.3%	69.5%
Non-Debt Capital Receipts	78,000	8,866	11.4%	18.3%
Recover of Loans	28,000	8,046	28.7%	42.6%
Other Receipts	50,000	820	1.6%	9.2%
Total Receipts	32,07,200	12,17,178	38.0%	37.9%
Revenue Expenditure	37,09,401	13,51,367	36.4%	37.1%
of which Interest	11,62,940	4,00,160	34.4%	34.0%
Capital Expenditure	11,11,111	3,00,987	27.1%	37.4%
Total Expenditure	48,20,512	16,52,354	34.3%	37.1%
Fiscal Deficit	16,13,312	4,35,176	27.0%	36.0%
Revenue Deficit	5,80,201	1,43,055	24.7%	32.7%
Primary Deficit	4,50,372	35,016	7.8%	38.9%

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.

REALITY CHECK ON THE DEFICIT NUMBERS

Let us look at some of the monthly data flows for August 2024. The monthly fiscal deficit accretion in August 2024 stood higher at ₹1.58 Trillion, compared to ₹1.41 Trillion in the month of July 2024. At the same time, the revenue deficit accretion in August 2024 nearly doubled to ₹1.21 Trillion in August 2024 compared to just ₹0.63 Trillion in July 2024. Even the primary deficit is normalizing after being in surplus for 3 months in a row due to the RBI dividend. How do these number look on a cumulative basis as a share of the full year target and the comparable period last year in FY24? It may be recollected here that in the interim budget presented in February 2024, the fiscal deficit had been pegged at ₹16.85 Trillion or 5.1% of the full year GDP. However, in the full budget presented on July 23, 2024, the fiscal deficit figure was revised lower to ₹16.13 Trillion or 4.9% of GDP for fiscal year FY25.

As of the close of August 2024, the fiscal deficit had reached 27.0% of the full year fiscal year target, which is lower than the comparable figure at 36.0% in the corresponding period last year. Similarly, the revenue deficit had reached 24.7% of the full year fiscal year target as of the end of August 2024, which is lower than the comparable figure at 32.7% in the corresponding period last year. Finally, the primary deficit had reached 7.8% of the full year fiscal year target as of the end of August 2024, which is lower than the comparable figure at 38.9% in the corresponding period last year. These rather vast dichotomies are due to the RBI dividend of ₹2.11 Trillion being accounted for entirely in the month of May 2024.

IS GOVERNMENT IN A GROWTH VERSUS FISCAL PRUDENCE DILEMMA?

That does sound a little far-fetched, but that is what the government of India actually finds itself in. It is a fiscal prudence versus growth dilemma, and till now the fiscal prudence story appears to be winning. The only question is whether the fiscal prudence is being achieved at the cost of the growth engine? Here are some points to ponder over.

• When the RBI paid out a dividend bonanza of ₹2.11 Trillion to the government for the current fiscal year, the government had two choices. It could enhance the 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. It could have also opted for a mix of all three. However, in its full budget, the government only opted for higher subsidies and lower fiscal deficit, while leaving the capex target intact.
  The lower than expected fiscal deficit has had a positive impact on the markets in the sense that FPI flows have turned sharply positive since the full budget was presented. For instance, in the 2 months since the full budget was presented by the government, FPI flows into equity alone have been in excess of $10 billion, with debt also attracting an equal amount. FPI confidence has surely got a leg-up with lower fiscal deficit.
  
• Having said that, it is not just the lower capex target for the year, but even the capex usage has been very low this year. That has created a situation wherein the core sector growth for August 2024 slipped into negative zone at -1.77%. That is not great news since this is the first core sector contraction in the last 42 months. If you ignore the COVID period, then this is the first core sector contraction since April 2015.

The moral of the story is that the obsession with fiscal deficit has been a doubled edged sword. It has raised the confidence of foreign investors, but has come at the price of contraction in infrastructure output.

STORY OF GOVERNMENT REVENUES UPTO AUGUST 2024

In FY24 fiscal deficit was eventually contained at 5.6%, which is 30 bps lower than the original estimate and 20 bps lower than the revised estimate. For FY25, the interim budget had projected fiscal deficit at 5.1% of GDP. However, post the bumper dividend of ₹2.11 Trillion paid out by the RBI, the fiscal deficit target for FY24 has been scaled down by 20 bps to 4.9%.

• Against the sharply enhanced full year total receipts target of ₹32.07 Trillion, the central government has already achieved ₹12.17 Trillion of total receipts as of the end of August 2024. That is, 38.0% of full year revenue target for FY25, which is marginally higher than the comparable 5-month period in FY24. However, if adjusted for the RBI dividend; the revenue performance appears to be lower than the previous year in first five months.
  
• 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 to ₹25.83 Trillion in the full budget in July. This net tax revenues is net of devolvement and refund. For FY25, till the end of August 2024, the government has achieved net tax revenues of ₹8.74 Trillion, showing 33.8% target achieved. This figure is lower compared to the corresponding FY24 figure, which shows revenues under some pressure in FY25.
  
• 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 ₹3.34 Trillion (61.3% of full year target) as of the end of August 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. Also, the PSU dividends in FY25 are also slated to be 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.

The flow of government tax revenues in FY25 was supposed to be higher than in FY24, which seems to the be the case in absolute terms. However, as compared to the more aggressive targets set in FY25, the revenue story appears to be struggling.

STORY OF GOVERNMENT SPENDING UPTO AUGUST 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 August 2024.

• 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 August 2024, the total expenditure stood at ₹16.52 Trillion, or 34.3% 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 August 2024, there has been actual spending to the tune of ₹13.51 Trillion. That is 36.4% of full year target; which is lower than the corresponding figure of the previous fiscal year at 37.1%.
  
• Out of the revenue spending, interest payment target for FY25 has been lowered to ₹11.63 Trillion in the full budget in July 2024. As of the close of August 2024, a sum of ₹4.00 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 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 ₹3.01 Trillion as of August 2024 or 27.1% 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, and the government has decided not to use the RBI dividend to boost capex. To add to that, even the pace of capex spend has been much lower than previous years.

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 typically runs 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 been rapid. 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 in July 2024. Till the end of August 2024, the fiscal deficit achieved is 27.0% of the full year deficit, so still there is still a lot of leeway for the government. However, this includes the full impact of the RBI dividend payout 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. Revenue deficit is like borrowing for your morning breakfast. As of the end of August 2024, the revenue deficit stood at ₹1.43 Trillion or 24.7% of full year target; after being in Revenue Surplus as of the end of June due to RBI dividend.
  
• 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 August 2024, the 5-month cumulative ratio of revenue deficit to fiscal deficit stands at 32.87%. That ratio appears to have normalized compared to the previous month.
  
• 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 in July 2024. Till last month, it was in surplus due to the lag effect of the RBI dividend, but this month, it has gone back into deficit mode.

HOW FY25 FISCAL DEFICIT WAS FUNDED AS OF AUGUST 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 ₹4.35 Trillion (27.0%) as of August 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 22% market borrowing was done till end of August. 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. That is the good news on the fiscal deficit front.