Fiscal Deficit touches 33.9% of FY24 target by end July

2 Sep 2023 , 01:11 PM

It shows the fiscal deficit increasing at a rapid pace, as a combination of subdued revenue growth and rapid capex spending have made the fiscal deficit move up faster than last time. Also, with less than one year to go for the central elections, the government spending is going to automatically be on the rise. The data on fiscal deficit and revenue deficit is disclosed each month by the Controller General of Accounts (CGA), and published with a lag of one month. As of the close of August 2023, the CGA published the fiscal deficit data of July 2023 along with the cumulative data for the first 4 months of FY24. 

In the previous fiscal, FY23, the central fiscal deficit (CFD) had been pegged in the Union Budget 2022-23 at 6.4%. The actual fiscal deficit for FY23 was marginally lower at 6.32% of GDP. This paved the way for the Finance Ministry to set a more ambitious and aggressive target of 5.9% for FY24. The reduced fiscal deficit target at 5.9% of GDP assumes robust direct and indirect revenues as well as reduction in subsidies. There is a catch here. In the last couple of years, the central government has spent more than budgeted on the capex side, even at the cost of revenue spending. The logic is appropriate; that due to the strong externalities and the multiplier effect of government capex spending, it should catalyse growth in GDP. That has been happening, but higher GDP can only support a slightly higher fiscal deficit spending in absolute terms. That is the challenge in the second half of FY24.

Fiscal deficit target simpler in FY23; more complex in FY24 

In FY23, the fiscal deficit target was a lot more straight forward. Revenues from direct and indirect taxes were buoyant, which made up for the shortfall in divestment revenues. In FY24, the RBI dividend to the central government has been much more than expected, but not much has happened on the disinvestments in the first half of FY24. Hence, it remains to be seen how the aggressively lower target of 5.9% fiscal deficit is achieved in FY24. After all, a 50 bps fall in fiscal deficit as share of GDP is a tough ask. The first challenge will be tax revenues, which are expected to stagnate or grow marginally, at best, on a yoy basis.  There is the overhang of weak rural demand and pressure on exports emanating from the fear of a global economic slowdown. Indian goods and services exports have already been dented.

Secondly, the subsidy bill may not come down as easily expected. While fertilizer subsidy will be lower, the government plans to continue its free food program well into next year. That will put pressure on the finances. Also, oil prices are hovering around $85/bbl in the Brent market. That is a delicate situation, and anything higher could force the government to give fuel subsidies. After all, too much inflation is not a good idea in an election year. Above all, the government has underlined that it would not relent on capex and higher defence spending also cannot be ruled out. The next one year will see a slew of critical state elections, followed by the central elections. On the positive side, RBI dividend to the government has been twice the budgeted amount, while asset monetization is taking off in a big way via Gati Shakti. Above all, each month, India is setting records on GST collections. We have to see out the overall picture evolves. 

How did government revenues pan out as of end July 2023

With data up to the end of July 2023 now available, we have an evolving picture of how the revenues are panning out in FY24 as compared to the targets. Revenue flows in FY24 are seeing good traction; both on the direct and indirect tax front. Here are the key takeaways.

• Against the full year total revenue target of Rs27.16 trillion, the central government has achieved Rs7.75 trillion of revenues as of the end July 2023. That is, nearly 28.5% of full year revenue target, which is a comfortable position at the end of 4 months of FY24.

   

• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the full year target for net tax revenues (net of refunds and devolvement) at Rs23.31 trillion, the government has achieved net tax revenues of Rs5.83 trillion as of the end of July 2023, showing 25.0% target achieved. This has improved in July and gives hope that full year net tax revenue should be better than budget.

   

• 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. Securities transaction tax (STT) is included as part of the direct tax collections.

   

• For FY24, the target for non-tax revenue stood at Rs3.02 trillion of which the centre achieved Rs1.79 trillion (59.3%) as of end of July 2023. This percentage looks high since it includes Rs87,416 crore bumper dividend paid to the government by RBI for FY23.

   

• On the subject of non-debt capital receipts, the government had set a target of Rs84,000 crore and has achieved 16.3% of the target. This will only pick up momentum once the divestments and the strategic sales pick up.

To sum it up, the government flow of government tax revenues in FY24 has been slower than FY23, as of the end of July 2023. However, it has played catch up in recent months as latest data from direct and indirect tax flows come in.

Government spending dot plot as of July 2023

India has traditionally run a deficit; at a fiscal level and at revenue level as expenditures exceeded revenues. That gap was filled by borrowings (fiscal deficit). Here is a look at government spending for FY24 till end July 2023.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at Rs45.03 trillion for the full year FY24. As of the end of July 2023, the total expenditure stood at Rs13.81 trillion, or 30.7% of the full year target. It looks like unlikely that there could be any meaningful savings on the expenditure front.

   

• Revenue expenditure, which is targeted at Rs35.03 trillion for FY24 has seen actual spending to the tune of Rs10.64 trillion as of the end of July 2023. That is 30.4% of full year target. Revenue spending has picked up in July, and one must remember that the budgeted growth over last year was very conservative. 

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs3.00 trillion was paid out as of the first quarter of FY24. 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. Many of them tend to be fairly sticky.

   

• Capital spending for the full year FY24 is targeted at Rs10.00 trillion of which the government has achieved capex of Rs3.17 trillion for FY24 or 31.7%. The capex budget grew 50% over last year, and the government has been using the capex as a lever to buy growth amid global headwinds.

To sum up the spending story, despite the constraints and global headwinds, the government has not allowed its budgeted capex commitments to get affected; and that is the good news. Subsidy spending on fertilizers may come down but that may be offset by food and fuel. Also, with food inflation rising to 11.51% in July, India will have a tough time meeting its 5.9% fiscal deficit target.

Evolving narrative on the 3 deficits in FY24

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows fall short of the revenue spending. Hence some borrowings go towards meeting the revenue gap of the government; a form of borrowing for your morning breakfast. The bigger challenge is reining in the fiscal deficit as it also has debt implications. Here is a quick look at the 3 most critical deficits.

• The fiscal deficit (budget deficit) for the full year FY24 has been pegged at Rs17.87 trillion and as of the end of July 2023, the fiscal deficit for the year stands at Rs6.06 trillion or 33.9% of full year target. It has jumped sharply from 11.8% in May 2023.

   

• On revenue deficit front, the annual target is Rs8.70 trillion for FY24. As of the end of July 2023, the revenue deficit stood at Rs3.02 trillion or 34.7% of full year target. The revenue deficit to fiscal deficit ratio has spiked from 21.63% to 49.90% in 2 months.

   

• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That is targeted for FY24 at Rs7.07 trillion, and stands at Rs3.06 trillion as of the close of July 2023 or 43.2% of full year target. Higher rates could be a challenge.

To sum it up, the fiscal deficit, revenue deficit and the primary deficit are on target, but the spike over last couple of months is fairly steep. It remains to be seen how effectively the government is able to contain its central fiscal deficit (CFD) within the 5.9% target for FY24.

How was FY24 fiscal deficit funded up to July 2023

Out of the total fiscal deficit target of Rs17.87 trillion for FY24, India has touched fiscal deficit of Rs6.06 trillion (33.9%) by July 2023. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the Rs6.06 trillion fiscal deficit till the end of July 2023; domestic financing accounted for the bulk of Rs5.98 trillion while international financing was the residual amount. Out of the Rs5.98 trillion of domestic financing, market borrowings account for the bulk of Rs5.58 trillion. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. However, the government has already confirmed that it would not be increasing its borrowing target for the year FY24. Surely, the government has other plans to monetize its properties. We have to wait and watch.