India reports fiscal surplus in July 2022 after 28 months

2 Sep 2022 , 09:21 AM

The month of July 2022 has been special for the central government in terms of the reported deficit numbers. In India we are used to perpetual deficits in the fiscal account and the revenue account. What is interesting is that in July 2022, there was a fiscal surplus and also a revenue surplus. The revenue account surplus for July 2022 was Rs42,509 crore while fiscal account surplus was Rs11,040 crore.

What is special is that the central government is reporting a fiscal account surplus for the first time since March 2020; even that was at the height of the pandemic. In July 2022, the turnaround to a fiscal and revenue surplus was triggered by a sharp spike in tax revenues and big cuts in revenue spending, even as capital spending has remained stable. This is despite higher fertilizer subsidies and lower excise on oil due to duty cuts.

For the first 4 months of FY23 ending July 2022, the fiscal deficit stood at 20.5% of full year Budgetary Estimates (BE). This was 21.2% as of June 2022 and the fall is due to the fiscal surplus. The current year fiscal deficit had been originally projected at 6.4% of GDP in the Union Budget. While it was expected to go up to around 6.9% due to higher spending to contain inflation, July gives hope that government may hold fiscal deficit at 6.4% for FY23.

Fiscal deficit trajectory for Apr-Jul FY23

The Controller General of Accounts (CGA) publishes the fiscal deficit data with a lag of 1 month i.e. data up to July 2022 was published on the last day of August 2022. For the first 4 months of FY23 (April to July 2022), the fiscal deficit in absolute terms stood at Rs340,831 crore. That translates into 20.5% of the budget estimates of fiscal deficit for FY23 at Rs16,61,196 crore.

The government has earlier hinted at the possibility that the fiscal deficit for FY23 could be higher by about 50 to 60 basis points. This was due to the aggressive fight against inflation, which normally entails duty cuts to check landed costs of commodities like ores and crude oil.

The compensating duties did not help much, but the government has benefited from stable tax revenues and planned cuts in revenue spending. The disinvestment targets at Rs65,000 for the full year are much lower than FY22 and even the RBI surplus transfer was just one-third of last year.

For FY23, the budget estimate of fiscal deficit is Rs16,61,196cr, or 6.4% of GDP as per the last Union Budget. At the current run rate; for the remaining 8 month the government has a fiscal deficit leeway of Rs13,20,365 crore. The fiscal and revenue surplus in July 2022 has halted the surge in fiscal deficit as a percentage of GDP and that is positive news.

A look at revenues and spends for Apr-Jul FY23

Total receipts up to July 2022 were to the tune of Rs7.86 trillion, which is already 34.4% of the full year estimated receipts and better than estimated. There has been a consistent build-up in revenues each month helped by direct and indirect tax collections. This has more than offset the lower flows from RBI transfers and from disinvestment of PSU. Also GST collections have now stabilized at a new normal of Rs1.45 trillion to Rs1.50 trillion a month. Despite headwinds in terms of global hawkishness, supply chain constraints and commodity inflation; revenue flows have not seen much of an impact and have been buoyant.

The FY23 total receipts of Rs7.86 trillion comprised of Rs6.66 trillion by way of taxes and Rs1.20 trillion by way of non-tax revenues. The non-tax revenues were largely accounted for by Rs0.90 trillion by way of dividends and profits (including the RBI surplus transfer) and another Rs0.30 trillion by way of disinvestment of 2.5% stake in LIC and other PSUs. RBI dividend to the government was just about one-third of last year.

For the 4 months ended July 2022, the total expenditure (revenue plus capital spending) stood at Rs11.26 trillion or 28.6% of the full year expenditure target for financial year FY23 pegged at Rs39.45 trillion. The total spending of Rs11.27 trillion includes Rs9.18 trillion of revenues expenditure and Rs2.09 trillion of capital expenditure. The biggest components of revenue spending in the first 4 months of FY23 were defence services, crop subsidies, fertilizer subsidies and food subsidies. The biggest capital outlays were in defence.

The story of deficits in Apr-Jul FY23

Here are some key takeaways from the build-up of the various deficits in FY23.
a)      The net tax revenues of Rs6.66 trillion included gross tax collections of Rs8.69 trillion of which Rs2.03 trillion represents devolution of taxes to states and union territories.

b)      The non-tax revenues have been dominated by the dividend and interest receipts as well as the inflows from the divestment of LIC stake

c)      The budgeted interest payment for the full year is Rs9.41 trillion of which Rs2.84 trillion was paid till the end of July 2022, which is 30.2% of full year target.

d)      Revenue deficit up to July 2022 stood at 16.4% of full year budget. Revenue deficit as a share of fiscal deficit has been sharply lower at 47.6% as of end July 2022

e)      The primary deficit till July 2022 was 7.9% of full-year budget estimates. Primary deficit is fiscal deficit excluding interest payments.

In the four month period (Apr-Jul) of FY23, the big story was the surplus on the revenue account and fiscal account in July 2022. This is likely to make the journey to achieving 6.4% fiscal deficit much easier and avoiding spillage.

Government is doing a smart fiscal tightrope walk

In the Union Budget announced in February 2022, the markets had been impressed by the promise to contain fiscal deficit at 6.4% of GDP. The fight against inflation had briefly threatened to stretch the fiscal deficit back to 6.9% of GDP, but things appear to have turned around for the better. The revenues from taxes have been robust while the revenues from other sources have been estimated more conservatively.

That gives legroom for the government to ensure that fiscal deficit is reined in.

It is good to see the government showing urgency in cutting fiscal deficit without impacting growth-oriented spending. The month of July saw cuts in revenue spending even as capital spending has remained buoyant. Combined with robust revenues, this has created a sweet spot with a strong possibility of keeping fiscal deficit for FY23 in check. It is good to see the government using buoyant revenues to aggressively contain fiscal deficit. That remains the best way to reverse FPI outflows and impress rating agencies. As a promising emerging market, India just cannot afford to ignore these opinion makers.