FY24 FISCAL DEFICIT ENDS 20 BPS LOWER AT 5.6% OF GDP
The fiscal deficit update for March 2024 and for the full fiscal year FY24 were published by the Controller General of Accounts (CGA) on May 31, 2024. Normally, the fiscal deficit update id presented each month with a lag of 1 month (April fiscal deficit update is published on last day of May, and so on). However, the annual fiscal deficit is an exception as it is announced with a lag of 2 months. But, it was worth the wait. On the one hand, the economists and analysts were raising serious doubts over the ability of the government to defend the reduced fiscal deficit target of 5.8% for FY24. The original estimate was 5.9% of GDP, which was reduced to 5.8% in the interim budget. The final fiscal deficit as percentage of GDP came in at a flattering 5.6%, a full 20 bps better than the revised estimate.
FISCAL DEFICIT MIRACLE AT 5.6%: HOW WAS IT ACHIEVED
The fiscal deficit reading at 5.6% of GDP for FY24 was not just flattering, but almost confounded the best of analysts. Scratch the surface, and there are some obvious details that come out. There are certainly some positives, like higher than expected tax buoyancy, higher non-tax revenues and some stringent controls on revenue spending. However, there were also other measures that put fiscal prudence on top. The government decided to go slow on capex spending in the last quarter of FY24, due to the elections and as a mark of fiscal prudence. Secondly, the growth in capex for FY25 has been reduced from 30% in the previous two fiscal years to just 11% in FY25. However, it is also apparent that some of the outlays have been pushed to the next fiscal year (FY25). That is evident from the fact that the month of April 2024 saw nearly 12.5% of the full year FY25 fiscal deficit covered. However, one must give full credit to the government for managing such a delicate balance of capex, fiscal prudence, and revenues with so much finesse and panache.
RBI DIVIDEND CHANGES FISCAL DEFICIT EQUATIONS
For the just concluded fiscal year FY24, the RBI distributed a record ₹2,10,874 Crore as capital surplus to the central government. The RBI dividend for FY24 is a full 141.23% higher that the dividend declared by the RBI for FY23 and a full 106.74% higher than the estimate of RBI dividend in the interim budget. Actually, the surge is more than 106.74%, and here is why. The interim budget estimate of ₹1,02,000 Crore put out by the government actually includes the dividends paid out by PSU banks also. Hence the actual growth in RBI dividend for FY24 will be much more than 106.74%. Obviously, the RBI has had strong revenues in the year FY24 emanating from interest on global bonds, interest from repo related activities, gains from forex and revaluation of gold / dollar reserves. All these items and a lower spending enabled the RBI to pay a much higher annual dividend to the Indian government. The big question is; what does the government do with this largesse?
It remains to be seen, what the government does with the additional money, but it is certain that the impact on the fiscal deficit would certainly be salutary.
STORY OF GOVERNMENT REVENUES FOR FY24
With data up to the end of March 2024 (12 months of FY24) available, we have an evolving picture of how revenues panned out in FY24 against annual targets. Revenue flows in FY24 were actually better than expectations. Here are some key data points.
To sum it up, the flow of government tax revenues in FY24 may have been lower than FY23 momentum, but the growth on a higher base is still intact.
STORY OF GOVERNMENT SPENDING FOR FY24
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). Here is how government spending for FY24 looked as of the end of fiscal year FY24.
To be fair, the government has not allowed its capex commitments to be adversely impacted, despite pressure on reining in fiscal deficit. The strategy of not compromising on capex commitments is what makes the India growth story sustainable. For the FY24 GDP numbers just announced, the Indian economy flattered the street with 7.8% GDP growth in Q4FY24 and full year GDP growth of a healthy 8.2%. This record GDP growth among large economies comes on the back of robust capex commitments of the government.
TALE OF 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. 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 most critical deficits.
To sum up, the fiscal deficit, revenue deficit and the primary deficit have bettered the target and give out a clear picture of fiscal prudence as a strategy followed by the government.
HOW FY24 FISCAL DEFICIT WAS FUNDED BY THE CENTRE?
Out of the final fiscal deficit of ₹16.54 Trillion for FY24, India ended the year with fiscal deficit at 5.6% of GDP, against the revised estimate of 5.8%. The challenge with fiscal deficit is that it has to be funded (with borrowings) so the budget is balanced. Out of the ₹15.64 Trillion fiscal deficit for the full fiscal year FY24; domestic financing accounted for the bulk (96.67%) at ₹15.99 Trillion while international financing and investment redemptions made up the residual amount.
Out of the ₹15.99 Trillion of domestic financing, market borrowings accounted for the biggest chunk of 79.3%. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. The revised fiscal deficit target of 5.8% for FY24 bettered at 5.6% of GDP in FY24. With the generous RBI dividend of ₹2.11 Trillion, the RBI may look to cut FY25 estimates below 5.1% and FY26 below 4.5%! We can look forwards to some positive vibes for fiscal prudence in the full budget.
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