Fiscal deficit touches 58.9% of full year target as of Jan-22

2 Mar 2022 , 08:00 AM

For the first 10 months of FY22 ending Jan-22, fiscal deficit stood at 58.9% of full year target against 50.4% at the end of Dec-21. This is lower compared to the comparable period in FY21, when central government had scaled 66.8% of full-year fiscal deficit target by Jan-21.

This disparity has sharply narrowed compared to last month because now the revised fiscal deficit has been considered for fiscal 2020-21, which factors in the higher fiscal room to accommodate the higher welfare spending due to COVID-19. The original fiscal deficit estimate for FY21 was 3.5% of GDP under FRBM. Due to surge in fiscal spending on account of COVID-19, the fiscal deficit target was revised to 9.5% for FY21. The 66.8% figure that we see for FY21 is on the expanded fiscal deficit target.

For FY22, the fiscal deficit was originally estimated at 6.9% of GDP and revised to 6.8% on the back of higher GDP estimates. However, Budget-22 has pegged back the fiscal deficit for FY22 at 6.9%. Now that LIC IPO also looks tough, either this fiscal deficit may end up being higher or government will have to cut expenses. For FY23, fiscal deficit has been pegged at 6.4% of GDP in Budget-22, hinting at keenness to wind down lofty fiscal deficit targets.

Fiscal deficit trajectory for Apr-Jan FY22

The Controller General of Accounts (CGA) publishes the fiscal deficit data with a lag of 1 month i.e. the fiscal deficit data up to Jan-22 is published on the last day of Feb-22. For the first 10 months of FY22 ending Jan-22, fiscal deficit in absolute terms was sharply higher at Rs937,868cr, which is 58.9% of the budget estimate of Rs15,91,089cr.

It must be noted here that the overall fiscal deficit target has gone up by Rs84,277cr in line with the Union Budget hiking the fiscal deficit target for FY22 by 10 bps. The cumulative fiscal deficit as share of full fiscal year target stood at 36.3% as of Oct-21, 46.2% as of Nov-21 and 50.4% as of Dec-21. At 58.9%, the fiscal deficit utilization has risen sharply in the last 3 months by 2,260 basis points.

For FY22, the budget estimate of fiscal deficit is Rs15,91,089cr, which is 6.9% of GDP for the year as per Budget-22. That means; for the remaining 2 months, the government has a fiscal deficit leeway to the tune of Rs653,221cr. With Omicron under check, government could use this buffer in case the LIC IPO has to be put off to FY23, which now looks very likely considering the pressure on FPI flows. Currently, factors like Fed hawkishness, spike in crude prices, higher input costs and geopolitical risk are triggering risk-off flows by FPIs.

How central revenues and expenditure panned out in Apr-Jan FY22

Total receipts up to Jan-22 were to the tune of Rs18.72 trillion, which is already 85.9% of the full year estimated receipts. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections. If you compare with the first 10 months of last year, the actual receipts this year are nearly 45.83% higher.

The FY22 total receipts of Rs18.72 trillion comprised of Rs15.47 trillion by way of taxes and Rs2.91 trillion by way of non-tax revenues; largely accounted for by Rs1.42 trillion by way of dividends and profits. The biggest chunk under this header was the Rs102,000cr dividend paid by RBI to the government as part of its annual dividend transfer.

For the period ended Jan-22, the total expenditure (revenue plus capital spending) stood at Rs28.09 trillion or 74.5% of the full year expenditure target for financial year 2021-22. This includes Rs23.68 trillion of revenues expenditure and Rs4.42 trillion of capital expenditure. The biggest components of revenue spending in the first 10 months of FY22 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays till date has been in the area of defence followed by civil aviation, which is largely the losses on account of the sale of Air India to the Tata group, which has been shown as capital outlay.

Tracking the fiscal deficit for Apr-Jan FY22

Here are some key points pertaining to the build-up of fiscal deficit for FY22, to date.

a) The net tax revenues of Rs15.47 trillion included gross tax collections of Rs20.98 trillion with Rs5.51 trillion representing devolution of taxes to states and union territories.

b) The non-tax revenues of Rs2.91 trillion consists of interest, dividend and other fiscal and economic services, predominated by Rs1.02 trillion RBI dividend.

c) The budgeted interest payment for the full year is Rs8.14 trillion of which Rs6.15 trillion was paid till the end of Jan-22.

d) Revenue deficit up to Dec-21 stood at 48.6% of full year budget. Revenue deficit as a share of fiscal deficit has fallen from a high of 67% in Aug-21 to 56.4% in Jan-22. This fall in revenue deficit ratio can be attributed to the Air India loss reported as capital outlay.

e) The primary deficit till Jan-22 was 41.6% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.

Time to aggressively prune fiscal deficit

To the credit of the finance minister, it must be said that Budget 2022 did make a sincere attempt by reducing the target fiscal deficit for FY23 by 50 basis points to 6.4%. This is all the more respectable in the light of the ongoing political tensions in Russia and Ukraine and the possible implications for crude prices. It is estimated that every $10 increase in the price of Brent crude worsens the (trade deficit / total trade ratio) by about 30-50 bps. Crude has already traversed from $70/bbl to $100/bbl in the year 2022 and oil traders are pegging crude at closer to $120 by end of March 2022. That will continue to be an overhang.

The fiscal deficit appears to be on target for 6.9% in FY22, but divestment targets have consistently fallen short of expectations. In FY22, India may still manage despite falling short of divestment targets. However, FY23 would be more challenging. Direct and indirect tax revenues may have peaked and there is limited scope to tax oil further. In these conditions, the government must provide a 3-year glide path for lowering fiscal deficit. It may sound ambitious, but it will give a lot of comfort to markets and investors.