Fiscal deficit scales 82.8% of full year target in February 2023

3 Apr 2023 , 09:32 AM

With 11 months of FY23 elapsed and just one more month of fiscal deficit data to be reported, India’s central fiscal deficit (CFD) stands at 82.8% of full year fiscal deficit target. It may be recollected that in Union Budget 2022-23, announced in February 2022, the government had announced a rather conservative fiscal deficit of 6.4% of GDP. With the overall fiscal deficit at 82.8% of full year absolute target, the chances are quite bright that Indian government closes FY23, with fiscal deficit under 6.4% of GDP. 

Normally, it is the month of March that puts a lot of pressure on fiscal deficit. However,  with a 17.2% leeway it bodes well for the fiscal deficit target for FY23 to be in limits. In addition, it may even induce the government to revise its fiscal deficit target for FY24 lower from 5.9% as stipulated in the February 2023 Union Budget. For now, it looks like the fiscal deficit levels are finally being brought under control.

How did the government revenues pan out in FY23?

One of the factors helping to keep central fiscal deficit under control in FY23 was the robust revenue flows; much better than expectations. Revenue flows in FY23 have been driven by robust direct tax and indirect tax flows. Here are key takeaways on the revenue front.

• Against the full year total revenue target of Rs23.84 trillion, the central government has achieved Rs19.81 trillion of revenues as of the end of February 2023. That is, nearly 84.3% of full year revenue target has been achieved with one month of FY23 to go.

   

• For full year FY23, the target for net tax revenues (net of refunds and devolvement) has been pegged at Rs20.87 trillion, of which tax revenues of Rs17.32 trillion has been achieved as of the end of February 2023, showing a success ratio of 83%.

   

• Net 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.

   

• For the FY23, the target for non-tax revenue stands at Rs2.62 trillion of which the centre has achieved Rs2.49 trillion (95%) as of end of February 2023. Non-tax revenues comprise of dividends, interest, and capital repayment by the RBI.

   

• For FY23, the central government had revised its disinvestment target to Rs50,000 crore, essentially from minority stake sale. However, FY23 disinvestment revenues fell short at Rs34,896 crore. That was because the sale of HZL and SUUTI shares were put off to next fiscal while BPCL divestment has been dropped.

Tracking government expenditure dot plot for FY23

India has traditionally been a country that has run a deficit; at a fiscal level and at revenue level as expenditures consistently exceeded revenue levels. That gap was met by borrowings (fiscal deficit). Firstly, how did spending pan out in FY23.

• Total expenditure, comprising of revenue expenditure and capital expenditure, was targeted at Rs41.87 trillion for the full year FY23. As of the end of February 2023, the total expenditure stands at Rs34.94 trillion, or nearly 83.4% of the full year target. That is comfortable leeway for the government to stay within its spending limits.

   

• Revenue expenditure, which was targeted at Rs34.59 trillion for FY23 has seen total spending to the tune of Rs29.03 trillion as of the end of February 2023. That is 83.9% of full year target, and the government may look to go slow on non-essential spending to save more room for capital spending. That has been the trend in last few years.

   

• Out of the revenue spending, interest payment target for FY23 stands at Rs9.41 trillion of which Rs7.99 trillion has already been paid as of the end of February 2023, so just about 15% of the total full year interest bill is still left to be defrayed.

   

• Capital spending for the full year FY23 is targeted at Rs7.28 trillion of which the government has already completed capex of Rs5.90 trillion as of the end of February 2023. Although 81.1% of the capex is done, the government may look to shift funds from the revenue spending budget to the capex budget, as committed in Union Budget FY24.

   

• For the first 11 months of FY23, major items of revenue spending include farm subsidies, fertilizer subsidies, food and PDS subsidies, defence spending, government salaries, pensions etc. On the capital spending side, the major outlays for the government are in the telecom sector capex, atomic energy capex, defence sector capex and capital transfer to the states for supporting capex.

The interesting story of deficits for FY23

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows are not sufficient to meet the revenue outflows. Hence some of the borrowings also go towards meeting the revenue gap of the government. Here let us look at 3 of the most important deficits in the central government accounts, and how they trended.

• The fiscal deficit (budget deficit) for the full year FY23 has been pegged at Rs17.55 trillion and as of the end of February 2023, the fiscal deficit for the year stands at Rs14.54 trillion. In other words, the current fiscal deficit as of February 2023 stands at 82.8% of the full year target. That gives hope that fiscal deficit stays within the target of 6.4% of GDP for FY23.

   

• We turn to the revenue deficit, which some refer to as borrowing for morning breakfast. Out of the total annual target of Rs11.11 trillion of revenue deficit, a revenue deficit of Rs9.23 trillion has been achieved for as of February 2023; or 83% limit used. The ratio of revenue deficit to fiscal deficit sharply higher at 63.45% as of February 2023.

   

• Finally, the primary deficit, the fiscal deficit excluding the interest effect was targeted at Rs8.15 trillion for the full year. It stands at Rs6.55 trillion as of February 2023; or nearly 80.4% of the full year target.

How has the fiscal deficit been funded in FY23?

The challenge with fiscal deficit is that it has to be funded (typically with borrowings) so that the budget is eventually balanced. Out of the 14.54 trillion fiscal deficits achieved till February 2023, domestic financing accounted for Rs14.26 trillion while international financing was just about Rs0.28 trillion. Out of the Rs14.26 trillion of domestic borrowings, market borrowings account for a whopping Rs11.74 trillion, while the balance of Rs2.52 trillion was via small savings, provident funds, and other national savings schemes.

One of the reasons, the fiscal deficit problem may be around for some more time is the sharply higher subsidy bill. For FY23, the revised subsidy bill estimates stand at Rs5.22 trillion of which Rs4.60 trillion (88%) has been utilized in the current year. Out of the Rs5.22 trillion budgeted subsidies, food subsidy is Rs2.87 trillion, urea subsidy is Rs1.54 trillion, nutrient subsidy is Rs0.71 trillion and petroleum subsidy a marginal Rs0.09 trillion. While the fertilizer subsidy (for rabi and kharif) has been 100% utilized as of February 2023, food subsidy utilization is just 78%. The good news is that FY23 promises to be a year when fiscal deficit would be finally under control and within the set target.