FY25 begins with a big fiscal deficit at 12.5% of full year target

4 Jun 2024 , 10:24 AM

WHY THE SURGE IN FISCAL DEFICIT IN APRIL 2025

For the first month of a financial year, the fiscal deficit was relatively high for FY25. It may be recollected that the government has set the fiscal deficit ₹16.85 Trillion for the full year FY25. The Controller General of Accounts (CGA) just reported the FY24 fiscal deficit, which came in sharply lower at 5.6%. For FY24, the original fiscal deficit was pegged at 5.9% of GDP. However, on the back of robust revenues from tax and non-tax sources, the fiscal deficit target for FY24 was reduced to just 5.8% of GDP in the interim budget presented by the government on February 01, 2024. The actual fiscal deficit for FY24 was 20 bps lower at 5.6%, which is a strong achievement. However, that could have other implications.

Firstly, it means that part of the fiscal deficit in the last quarter of FY24 was carried forward to FY25. That could partially explain the spike in the first month fiscal deficit to 12.5% of the full year target. However, this figure could stabilize in the months to come. The 5.1% fiscal deficit target for FY25 was set by the government assuming about ₹1.02 Trillion as dividend from the RBI and PSU banks. Now, the RBI alone has paid a dividend of ₹2.11 Trillion and the PSU banks could add another ₹20,000 Crore. In short, the government will have additional ammunition of ₹1.30 Trillion in FY25 and that is likely to be utilized partially to cut the fiscal deficit target for FY25 to below 5% and partially to boost capex growth. That puts more pressure on the fiscal deficit targets this year.

WILL THE EXIT POLLS AND ELECTION OUTCOME IMPACT FISCAL DEFICIT?

As we write, the exit polls have just been published by various polling agencies and media agencies. The verdict almost appears to be unanimous that the NDA will get a third shot at power. That was already the consensus in the market, although there were concerns that the BJP may struggle to get a majority of 272 on its own. We are still to get the final poll outcome on June 04, 2024. However, the indications in the exit poll are that the outcome is likely to be at par or better for the NDA in latest elections. If the exit polls turn out to be true, then Mr. Modi will become only the second prime minister after Pandit Nehru to get a third successive mandate.  We will know that on June 04, 2024; but the big question now is if the exit polls are correct, then how would it impact the fiscal management.

One thing is certain that the government will go for the jugular when it comes to bringing down the fiscal deficit. You could probably see fiscal deficit at under 4% between FY26 and FY27, which would be broadly in line with the original FRBM. The full budget will also see a more aggressive thrust to capex, because that is the narrative that has appealed to the industry, even as interest rates have been generally higher than the median. Anoth change we could see is more aggression in ensuring a low interest rate regime and that would reduce the borrowing cost pressure on the government as well as the private sector. With the strong growth in GDP for FY24 at 8.2% and fiscal deficit in control, the RBI can now really afford to undertake pre-emptive rate cuts. Once the uncertainty of elections is over and the full budget is out, the RBI may have the perfect setting for pre-emptive rate cuts.

STORY OF GOVERNMENT REVENUES IN APRIL 2024

With the FY24 fiscal year reporting fiscal deficit at 5.6%, 30 bps lower than the original estimate and 20 bps lower than the revised estimate, the FY25 fiscal deficit comes into focus. The interim budget has already been aggressive at 5.1% and we could see more action in cutting this deficit further in the full budget. Here is a quick dekko at how the fiscal deficit situation has evolved in the first month of FY25 i.e., at the close of April 2024.

• Against the enhanced full year total receipts target of ₹30.80 Trillion, the central government has already achieved ₹2.13 Trillion of total receipts as of the end of April 2024. That is, 6.9% of full year revenue target for FY25, which is higher than the similar period in FY24. Revenues normally pick up from the second quarter onwards.
• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the sharply higher full year target for net tax revenues (net of refunds and devolvement) at ₹26.02 Trillion, the government has achieved net tax revenues of ₹1.85 Trillion as of the end of April 2024, showing 7.1% target achieved. This figure is , once again higher, compared to the corresponding FY24 figure.
• 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 revenue stood sharply hiked at ₹4.00 Trillion of which the centre achieved ₹0.27 Trillion (6.8% of full year target) as of the end of April 2024. The sharp revenue upgrades on this front are largely from the better than expected revenues from interest, dividends, and RBI payout. That is likely to be revised in the full budget by more than ₹1 Trillion, so equations could change post July.
• On the subject of non-debt capital receipts, the government set the target at ₹79,000 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, this is a relatively small part in the overall scheme of things.

To sum it up, the flow of government tax revenues in FY25 is likely to be sharply higher than in FY24. The early indication in FY25 from high frequency signals like GST collections, e-way bills and freight volumes are positive. Let us now turn to the expenditure side.

STORY OF GOVERNMENT SPENDING IN APRIL 2024

India has traditionally run a deficit; at a fiscal level and at revenue level as spending has always exceeded receipts. That gap was filled by borrowings (fiscal deficit), but we will come back to that later. Here is how government spending for FY25 looked as of the end of April 2024.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at an enhanced ₹47.58 Trillion for the full year FY25. As of the end of April 2024, the total expenditure stood at ₹4.23 Trillion, or 8.9% of full year target. In FY25, the spending is higher than the corresponding year-ago expenditure in FY24.
• Revenue expenditure, which is targeted slightly higher at ₹26.55 Trillion for FY25 has seen actual spending to the tune of ₹3.24 Trillion as of the end of April 2024. That is 8.9% of full year target. That is, once again, higher than comparable period last year.
• Out of the revenue spending, interest payment target for FY25 stands higher at ₹11.90 Trillion of which ₹1.28 Trillion was paid out as of April 2024. 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 is fuel subsidy.
• Capital spending for the full year FY25 is targeted at a modest ₹11.11 Trillion of which the government has achieved capex of ₹0.99 Trillion as of April 2024 or 8.9% of full year budget. After growing capex spending at 30% in FY23 and FY24, the interim budget had presented a capital outlay growth of just 11% for FY25. However, that equation could change considering the higher than expected RBI dividend, so we could eventually have the capex growing closer to 20%. We have to await the final budget in July 2024, once the new government is formed and in place.

The government has not allowed capex commitments to slow down, despite pressure on reining in fiscal deficit. However, it may use the RBI largesse to push it up further. The strategy of not compromising on capex commitments is what makes the India growth story sustainable. Remember, in FY24, India GDP grew at 8.2%

STORY OF THE 3 DEFICITS: FISCAL, REVENUE AND PRIMARY

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows fall short of the revenue spending. That is a bit like borrowing for your morning breakfast, but it does boil down to that. The bigger challenge is reining in the fiscal deficit (Budget Deficit) as it also has debt and interest rate implications. The fiscal deficit is funded through the government borrowing program. Here is a quick dekko at the 3 critical deficits in FY25.

• The fiscal deficit (budget deficit) for FY25 has been now revised lower to ₹16.85 Trillion and as of the end of April 2024, the fiscal deficit for the year stands at ₹2.10 Trillion or 12.5% of full year target. The high level of fiscal deficit between in the first month itself, could be attributed to some of the FY24 year-end expenses being carried forward to FY25. That may be visible in April 2024. But, the figure is sharply in the corresponding period of FY24.
• Revenue deficit target for FY25 has also been pegged sharply lower at ₹6.53 Trillion for FY24 on the back of robust revenue flows. As of the end of April 2024, the revenue deficit stood at ₹1.12 Trillion or 17.1% of full year target. The critical ratio of Revenue deficit to fiscal deficit has been budgeted for FY25 at 38.77%. As of the close of April 2024, the revenue deficit as a share of fiscal deficit stood at 53.27%. This may look inordinately skewed, but should rectify as we go along. Some of the revenue deficit items do tend to get front-ended in this case.
• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That target has been lowered for FY25 to ₹4.95 Trillion, and stands at ₹0.82 Trillion as of the close of April 2024 or 16.5% of full year target.

The government has played a bold gambit by reducing the fiscal deficit, revenue deficit and the primary deficit; in terms of the rupee amount as well as a percentage of GDP. The additional dividend largesse from the RBI should come as a blessing in disguise.

HOW FY25 FISCAL DEFICIT WAS FUNDED IN APRIL 2024

With just one month of the fiscal year FY25 completed, it may be too early to look at the funding of fiscal deficit. Nevertheless, we shall look at it to get a clearer picture. Out of the total fiscal deficit target of ₹16.85 Trillion for FY24, India has touched fiscal deficit of ₹2.10 Trillion (12.5%) as of the end of April 2024. The challenge with fiscal deficit is that it has to be funded (with borrowings) so the budget is kept balanced. Out of the ₹2.10 Trillion fiscal deficit till the end of April 2024; domestic financing accounted for ₹2.12 Trillion while international financing and investment redemptions actually had a negative impact.

Out of the ₹2.12 Trillion of domestic financing, market borrowings accounted for the biggest chunk of 55.94%. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. The substantially lower fiscal deficit target of 5.1% for FY25 looks aggressive, but the numbers appear to be fairly credible. The next thing to watch is how much the RBI largesse of the ₹2.11 Trillion dividend to the government is instrumental in reducing the fiscal deficit. For that we have to wait till July 2024 for the full budget presentation by the new finance minister.