Fiscal Deficit touches 36% of FY24 target by end August 2023

2 Oct 2023 , 09:02 AM

The fiscal deficit data, along with the statement of government accounts for FY24 up to August 2023 is quite revealing. While the fiscal deficit had shown a rapid increase in the months of June and July, the growth has tapered in August. Fiscal deficit as a percentage of full year target has just risen from 33.9% to 36% as of the end of August 2023. This also means that, under normal circumstances, the fiscal deficit target of 5.9% of GDP for FY24 should be easily defended. However, it must be remembered that there is less than one year to go for the central elections and there are a slew of major state elections coming up in between. So, the government spending is going to rise. As of the close of September 2023, the CGA (Controller General of Accounts) has published the fiscal deficit data of August 2023 along with the cumulative data for the first 5 months of FY24. 

In 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; which is appreciable considering that the government had to spend aggressively amidst high inflation. This encouraged the Finance Ministry to set a more ambitious target of 5.9% for FY24. But, this lower fiscal deficit is based on certain assumptions. It assumes robust direct and indirect tax revenues as well as reduced (or at least stable) subsidies. In last 2 years, the central government has spent more than budgeted on the capex side, even at the cost of revenue spending. The logic is the strong externalities and the multiplier effect of government capex spending, and the catalytic impact it has on GDP growth. However, the positive takeaway is that the government has maintained its borrowing target at Rs6.55 trillion for the H2-FY24, which is a signal that full year fiscal deficit has not surprises.

Key risk factors for fiscal deficit in FY24 

In FY23, the fiscal deficit story was a lot simpler. Revenues from direct and indirect taxes were buoyant, which offset lower divestment revenues. Also, the higher capex was kept in check with controls over revenue spending. To be fair, FY24 has seen a much higher RBI dividend to the central government. But, disinvestments are way below target and once again look like falling short of targets. FY24 is factoring in a 50 bps lower fiscal deficit compared to FY23; and that is not going to be a cakewalk. There are a number of factors here. Firstly, tax revenues are either expected to stagnate or grow marginally, due to pressure on growth amidst a global slowdown. In addition, weak rural demand is likely to hit consumption spending. As if that was not enough, the last two quarters have seen a distinct pressure on services exports due to weak global demand and pricing pressure.

Secondly, subsidy bill may see some items falling, but others may increase. Fertilizer subsidies are likely to be lower, but the extension of the free food program well into next year means that food subsidies will be a pressure point. To add to the problems, crude has already crossed $93/bbl and the government may soon have to offer subsidies to ensure that consumer prices do not go through the roof. The Indian government is just trying to get to grips with inflation in the last 2 years and the last thing the government wants is inflation resurfacing in an election year. Also, the government is unlikely to relent on capex and higher defence spending also cannot be ruled out. A lot will depend on how the asset monetization program takes off and whether there are positive surprises on the direct and indirect tax collections front. The moral of the story is 5.9% is going to be a stiff CFD target.

How did government revenues pan out as of end August 2023

With data up to the end of August 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. Here are some key takeaways.

• Against the full year total revenue target of Rs27.17 trillion, the central government has achieved Rs10.29 trillion of revenues as of the end August 2023. That is, 37.9% of full year revenue target, which is better than the comparable period in FY23.

   

• 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 Rs8.04 trillion as of the end of August 2023, showing 34.5% target achieved. This has improved sharply in the last two months; although it is still lower than the comparable period last fiscal.

   

• 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 Rs2.10 trillion (69.5%) as of end of August 2023. This percentage looks high since it includes Rs87,416 crore bumper dividend paid to the government by RBI for FY23. That has resulted in dividends in first 5 months at 117% of full year target.

   

• On the subject of non-debt capital receipts, the government had set a target of Rs84,000 crore and has achieved 18.3% of the target. This will only pick up momentum once the divestments and the strategic sales pick up; where the visibility is still quite low.

To sum it up, the government flow of government tax revenues in FY24 has been slower than FY23, as of the end of August 2023, but it is just marginally lower. The good news is that, in terms of overall revenues, India is better off that it was after 5 months of FY23.

Government spending summary as of end August 2023

India has traditionally run a deficit; at a fiscal level and at revenue level as expenditures have always exceeded revenues. That gap was filled by borrowings (fiscal deficit). Here is a look at government spending for FY24 till end August 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 August 2023, the total expenditure stood at Rs16.72 trillion, or 37.1% of the full year target. In FY24, the spending is already ahead of FY23, so it is unlikely there would 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 Rs12.98 trillion as of the end of August 2023. That is 37.1% of full year target. Revenue spending picked up in July and August and the spending is more than it was in the comparable period in FY23.

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs3.68 trillion was paid out as of August 2023. 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 Rs3.74 trillion for FY24 or 37.4%. The capex budget grew 50% over last year, and the government has already committed that it would not relent on the capex quantum, due to its strong externalities and implications for growth.

To sum up the spending story, despite the constraints and global headwinds, the government has not allowed its budgeted capex commitments to get affected. That is the big story. Subsidy spending on fertilizers may come down but that may be offset by food and fuel subsidies during the year. India is also struggling with spiking food inflation, but that is a problem for a different forum altogether.

How the troika of deficits are evolving 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. That is like borrowing for your morning breakfast; but that is the way it is. The bigger challenge is reining in the fiscal deficit as it also has debt implications, since the fiscal gap is met by borrowings. 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 August 2023, the fiscal deficit for the year stands at Rs6.43 trillion or 36% of full year target. The frenetic growth in fiscal deficit between May and July has been relatively arrested, but it is still higher than comparable period of FY23.

   

• On revenue deficit front, the annual target is Rs8.70 trillion for FY24. As of the end of August 2023, the revenue deficit stood at Rs2.84 trillion or 32.7% of full year target. That means, there has been a revenue surplus in August 2023, which is a rare event. The revenue deficit to fiscal deficit ratio has fallen from 49.90% in July 2023 to 44.25% in August 2023. At least, in August, the Indian economy did not borrow for its morning breakfast.

   

• 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 Rs2.75 trillion as of the close of August 2023 or 38.9% of full year target. With rates coming down, there was a primary surplus in August 2023.

To sum it up, the fiscal deficit, revenue deficit and the primary deficit are on target, but the good news is the positive tidings on revenue deficit and primary deficit in August 2023. 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; although borrowings calendar indicate that it can.

How was FY24 fiscal deficit funded up to August 2023

Out of the total fiscal deficit target of Rs17.87 trillion for FY24, India has touched fiscal deficit of Rs6.43 trillion (36%) by August 2023. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the Rs6.43 trillion fiscal deficit till the end of July 2023; domestic financing accounted for the bulk of Rs6.33 trillion while international financing was the residual amount. 

Out of the Rs6.33 trillion of domestic financing, market borrowings accounted for almost the entire funding of fiscal deficit. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. The progress has been good this month; although one mut wait and watch how well the government is able to defend the 5.9% fiscal deficit target for FY24.