India reports fiscal at 8.1% of full year deficit as of June 2024

2 Aug 2024 , 09:26 AM

FULL BUDGET CUTS FISCAL DEFICIT FURTHER TO 4.9% OF GDP

When the full budget was presented by the Finance Minister on July 23, 2024, the expectation was that the fiscal deficit would be lowered with the support of the ₹2.11 Trillion received as dividend distribution from the RBI. But, first a quick background! In the previous budget for fiscal year FY24, the fiscal deficit target had been originally set at 5.9%. When the interim budget was presented in February 2024, the revised target for FY24 was reduced to 5.8% on GDP growth hopes. However, when the actual fiscal deficit number for FY24 was announced, it came in still lower at 5.6%. The interim budget had also projected the fiscal deficit for FY25 at 5.1%, which now stands reduced by 20 bps at 4.9% of GDP. With this move, the fiscal deficit has been brough down by a full 100 bps over one year. In terms of monthly show, the June month fiscal deficit came in at ₹85,097 Crore. This comes after there had been a fiscal surplus of ₹1.60 Trillion in May 2024 due to the RBI dividend adjustment. The cumulative fiscal deficit as of the end of June 2024 stands at ₹1.36 Trillion, which is 8.1% of the full year fiscal deficit target for the year.

However, there is one important thing to remember here. The latest monthly report by the Controller General of Accounts (CGA) has still used the total fiscal deficit target of ₹16.85 Trillion as the benchmark. However, it may be recollected, that in the full budget presented on July 23, 2024, the fiscal deficit in absolute terms had been cut to ₹16.13 Trillion for FY25. Therefor, if you consider the revised fiscal deficit of ₹16.13 Trillion as the benchmark, then the current status of fiscal deficit would be 8.4% pf full year target rather than 8.1%. However, that difference is not likely to be too material as the moral of the story is that the government has made positive progress in reining in the fiscal deficit. We will come back to the components of the deficit later. Let us first look at why the reduction in fiscal deficit is a strong message by the government about government finances.

WHY LOWER FISCAL DEFICIT IS A STRONG MESSAGE?

For the fiscal year FY25, the full budget has cut the fiscal deficit target further by 20 bps to 4.9%. Effectively, the fiscal deficit is 100 bps down in the last 1 year and the finance minister has promised to take the fiscal deficit to under 4.5% by end of FY26 as promised. Here is why this is a very significant move for the Indian economy.

• From the perspective of giving a macro message, it is quite clear that revenues are robust for the Indian economy on the back of strong GDP growth. Also, the government has curbed revenue spending rather than capital spending to bring down fiscal deficit.
• A sharply lower fiscal deficit is a clear vote for fiscal prudence by the government. The FRBM act puts the onus on the government to have a clear cut policy towards an equilibrium fiscal deficit level. Despite the pressures of the pandemic, the government has ensured that its goal of fiscal prudence is not adversely impacted.
• This move sends the right message to the global investors community. For instance, global rating agencies have been traditionally worried about high levels of fiscal deficit. Now, rating agencies have indicated that if India quickens the pace of lowering fiscal deficit, then it may be ripe for an upgrade too.
• It gives the right signals about the government borrowing program. Normally, the government borrows from the open market to fund the fiscal deficit. In this case, the lower fiscal deficit shows that the government has to rely less on borrowings to bridge the fiscal deficit in the current fiscal year.
• Lastly, low fiscal deficit also prevents any spike in interest rates or bond yields due to government borrowings crowding out the private borrowings. This not only enables the private sector to raise funds at economical rates of interest, but puts less pressure on the cost of borrowings of Indian corporates.

The government has given a positively strong message by cutting the fiscal deficit by a full 100 bps in one year; and that is a good starting point.

STORY OF GOVERNMENT REVENUES UPTO JUNE 2024

With FY24 fiscal deficit at 5.6%, 30 bps lower than the original estimate and 20 bps lower than the revised estimate; the FY25 fiscal deficit has come into focus. The interim budget has projected the FY25 fiscal deficit at 5.1% of GDP. This was further reduced to 4.9% of GDP for the full year FY25, giving a clear indication that it was serious about rapid rate cuts. One point to note here is that all the number we discuss here are based on the interim budget and the full budget presentation has not been accounted for..

• Against the enhanced full year total receipts target of ₹30.80 Trillion, the central government has already achieved ₹8.34 Trillion of total receipts as of the end of June 2024. That is, 27.1% of full year revenue target for FY25, which is higher than the similar period in FY24. However, this is largely due to RBI dividend accounting in May 2024.
• 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 ₹5.50 Trillion as of the end of June 2024, showing 21.1% target achieved. This figure is higher compared to the corresponding FY24 figure, but this includes the advance tax effect.
• 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 ₹2.80 Trillion (70.1% of full year target) as of the end of June 2024. This is largely on account of the RBI dividend of ₹2.11 Trillion being accounted in May 2024. Even here, only the interim budget data has been considered and the full budget data will get factored in the July 2024 report.
• 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, the divestment target is just ₹50,000 Crore for FY25, in full budget.

The flow of government tax revenues in FY25 is likely to be higher than in FY24. That is what the high frequency signals like GST collections, e-way bills and freight volumes are suggesting. We now look at how this money was spent by the government of India.

STORY OF GOVERNMENT SPENDING UPTO JUNE 2024

Fiscal deficit arises when the expenditures exceed receipts and the gap needs to be funded. For that, we need to understand how government spending for FY25 panned out as of the end of June 2024.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at an enhanced ₹47.66 Trillion for the full year FY25. As of the end of June 2024, the total expenditure stood at ₹9.70 Trillion, or 20.4% of full year target. In FY25, the spending is lower than the corresponding year-ago expenditure in FY24.
• Revenue expenditure, which is targeted slightly higher at ₹36.55 Trillion for FY25 has seen actual spending to the tune of ₹7.89 Trillion as of the end of June 2024. That is 21.6% of full year target; at par with the comparable period last fiscal year.
• Out of the revenue spending, interest payment target for FY25 stands higher at ₹11.90 Trillion of which ₹2.64 Trillion was paid out (net) as of June 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.
• Capital spending for the full year FY25 is targeted at a modest ₹11.11 Trillion of which the government has achieved capex of ₹1.81 Trillion as of June 2024 or 16.3% of full year budget. It must be noted here that the capex growth has dropped to just 11% in FY25 from a high of 30% in FY23 and FY24. However, the lag effect of past capex would still have a positive impact for some time. In the full budget on July 23, 2024, the finance ministry opted to use the entire inflow to soften the fiscal deficit, even as capex was held at the same level.

Clearly, the government is expecting a lot more of capex initiative now coming from the private sector.

STORY OF THE 3 DEFICITS: FISCAL, REVENUE AND PRIMARY

In India, the total receipts each year, not only fall short of the total expenditure, but also fall short of the revenue expenditure. Hence, India has run a revenue deficit as well as a fiscal deficit. Fiscal deficit had crossed 9% of GDP in FY21 due to the aggressive pandemic spending, but in the last three years, the move towards normalization has been rapid and appreciable. Here is a quick dekko at the 3 critical deficits in FY25.

• The fiscal deficit (budget deficit) for FY25 stands at ₹16.85 Trillion for FY25. However, it must be noted here that while the CGA has used the data pertaining to the interim budget, the actual fiscal deficit was reduced in the full budget from ₹16.85 Trillion to ₹16.13 Trillion. As of the end of June 2024, the fiscal deficit for the year stands at ₹1.36 Trillion or 8.1% of full year target. However, if you consider the revised fiscal deficit of ₹16.13 Crore for fiscal deficit, you are likely to see the fiscal deficit ratio at 8.4% of full year target, rather than 8.1% as reported by the CGA.
• Revenue deficit target for FY25 has also been pegged sharply lower at ₹6.53 Trillion on the back of robust revenue flow expectations. It is a bit like borrowing for your morning breakfast. As of the end of June 2024, the revenue surplus (that is correct) stood at ₹40,819 Crore. However, this surplus is again due to the RBI dividend of ₹2.11 Trillion being reported in the May 2024 revenues. This is despite the fact that the CGA reported a deficit in June to the tune of ₹50,104 Crore and the cumulative FY25 revenue surplus as of June 2024 may be more of an aberration. That should rectify as we go along through FY25.
• 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 in the interim budget, but has also reported a surplus in May 2024 due to the RBI dividend payout.

HOW FY25 FISCAL DEFICIT WAS FUNDED AS OF JUNE 2024

The fiscal deficit or the budget deficit is a gap that has to be filled up. It is typically filled up by borrowings; with the government either borrowing from the market or from the National Small Savings (NSS) account. Out of the total fiscal deficit target of ₹16.85 Trillion for FY24, India has touched fiscal deficit of ₹1.36 Trillion (8.1%) as of the end of June 2024. For FY25, the government has set a target of raising ₹16.70 Trillion of the fiscal gap through domestic borrowings. Out of this amount, ₹12.25 Trillion will be raised via market borrowings and ₹4.66 Trillion will be from small savings under the (NSS). However, with the fiscal deficit amount for FY25 reducing from ₹16.85 Trillion to ₹16.13 Trillion in the full budget, the break-up of funding the fiscal deficit should also fall proportionately. That break-up will out with the July report next month.