India closes FY24 with 20 bps lower fiscal deficit at 5.6%

1 Jun 2024 , 03:18 PM

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?

• To start with, it will make up for the shortfall in disinvestment target. In the last few years, India has consistently fallen short of annual disinvestment target. While asset monetization has helped to some extent, this bumper RBI dividend will surely be a big boost to the non-tax revenues of the government.
• Now that FY24 fiscal deficit has come in 20 bps lower at 5.6%, the FY25 target of 5.1% looks a lot more achievable. In fact, the 5.1% estimate was made before this bumper dividend announce of ₹2.11 Trillion was made by the government. It would enable the government to possibly reduce the fiscal deficit target for FY25 to below 5% and progressively, the FY26 target to below 4.5%. That should be a boost as India looks to get a rating upgrade, after S&P just upgraded its India outlook.
• The other possibility is that the government may decide to give a big thrust to capex spending. In the interim budget for FY25, the government had cut the growth in capex from 30% in FY23 and FY24 to just 11% in FY25. With the largesse from the RBI dividend, the government can afford to raise the capex growth back to 20% and ensure greater downstream impact on growth.

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.

• Against the enhanced full year total receipts target of ₹27.56 Trillion, the central government ended slightly better at ₹27.89 Trillion of revenues for the full fiscal year FY24. That is 101.2% of full year revenue target, which is marginally higher when compared with the FY23 fiscal year. However, this is positive outperformance, on top of revenues that have been revised upwards.
• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the slightly reduced full year target for net tax revenues (net of refunds and devolvement) at ₹23.24 Trillion, the government has achieved net tax revenues of ₹23.279 Trillion for FY24, showing 100.1% target achieved. This figure is marginally lower compared to the corresponding FY23.
• 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; and are net of state share and refunds.
• For FY24, the target for non-tax revenue stood sharply hiked at ₹3.76 Trillion of which the centre achieved ₹4.02 Trillion (106.9%) as of end of FY24. The sharp revenue upgrades on this front are largely from the better than expected revenues from monetization of assets like roads and mines in the current fiscal. This is covered under the header of Economic Services. Even dividends from PSUs were higher than expected.
• On the subject of non-debt capital receipts, the government reduced the target to ₹56,000 Crore due to tepid performance on the disinvestment front. It has achieved 108% of the target on the back of spike in miscellaneous receipts. Even the recovery of loans were better than the revised estimates for FY24.

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.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at a reduced ₹44.90 Trillion for the full year FY24. For the full fiscal year FY24, the total expenditure stood at ₹44.43 Trillion, or 98.9% of full year target. In FY24, the spending lower than the full fiscal year FY23.
• Revenue expenditure, which is targeted at a higher ₹35.41 Trillion for FY24 has seen actual spending to the tune of ₹34.94 Trillion for the full fiscal year FY24. That is 98.7% of full year target. That is lower than comparable period last year.
• Out of the revenue spending, interest payment target for FY24 stands at a lower ₹10.55 Trillion of which ₹10.64 Trillion was paid out in full fiscal year 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.
• Capital spending for the full year FY24 is targeted at a slightly lower ₹9.50 Trillion of which the government has achieved capex of ₹9.49 Trillion in FY24 or 99.9% of full year budget. With the base being reduced for FY24, the actual growth in FY25 should be higher than the budgeted 11.1% for capex. Of course, the higher than expected RBI dividend could also be the trigger for higher capex, apart from curtailing the fiscal deficit as a percentage of GDP further.

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.

• The fiscal deficit (budget deficit) for the full year FY24 was revised lower in the interim budget to ₹17.35 Trillion or 5.8% of GDP. As per the latest data published by the CGA, the fiscal deficit for FY24 stood at ₹16.54 Trillion or 95.3% of full year target. This means that the Indian government has curtail the fiscal deficit for FY24 to just 5.6% of GDP, as against the original target of 5.9% and the revised target of 5.8%. The accretion to fiscal deficit between January and February was more due to year-end reporting, and is along expected lines. Of course, the government has carried forwards some of the fiscal deficit to FY25, as is evident from the April 2025 fiscal deficit update.
• Revenue deficit target is also revised lower to ₹8.41 Trillion for FY24. As of the close of FY24, the revenue deficit stood at ₹7.66 Trillion or just 91.0% of full year target. The critical ratio of Revenue deficit to fiscal deficit ratio has always been the bane of the economy as it amounts to borrowing for morning breakfast. Let us also look at the ratio of revenue deficit to fiscal deficit for FY24. The budget target for this ratio was 48.49%. However, based on the final figures for FY25, this ratio has been actually lower at just 46.30%, which shows that government has successfully curtailed the revenue component of fiscal deficit.
• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That target has been lowered for FY24 to ₹6.79 Trillion, and stands at ₹5.90 Trillion as of the close of FY24 or 86.8% of full year target.

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.