India reports fiscal surplus in May-23 due to RBI Dividend

29 Jun 2024 , 08:56 AM

SURPRISE; A FISCAL SURPLUS IN MAY 2024

In India, we are so used to the idea of fiscal deficit, that fiscal surplus looks something out of place. The Indian economy reported a fiscal surplus in the month of May 2024 to the tune of ₹1.60 Trillion. However, that could be tad misleading because the bum per RBI dividend of ₹2.11 Trillion was accounted for in May and so the number looks out of place. Ideally, it should have been defrayed over the 12 months, but that is not the way it is done. Hence, one must take this fiscal surplus in May with a pinch of salt. This is just a one-time surplus in the fiscal account since the entire full year RBI dividend has been recorded in the month of May 2024. However, despite the RBI largesse, the cumulative figure for the first two months of FY25 is still showing a fiscal deficit of ₹50,615 Crore.

For April 2024, the FY25 fiscal deficit had touched an alarming 12.5% of GDP. However, that was because a lot of the fiscal year end items had got put off to the new fiscal year FY25. However, the impact of this RBI dividend has ensured that at the end of 2 months, the fiscal deficit is a lot more under control and the revenue account is actually in a surplus. We will come back to that point later on. For now, it would be relevant to note that the RBI dividend of ₹2.11 Trillion was much bigger than what had been estimated in the interim budget. In the interim budget, the government had projected ₹1.02 Trillion as dividend from the RBI and PSU banks combined. Now, RBI alone has paid a dividend of ₹2.11 Trillion and the PSU banks could add another ₹20,000 Crore to ₹30,000 Crore so the actual number could be closer to ₹2.50 Trillion. So, the government will have substantial additional ammunition in FY25. Let us shift to how that can be used to cut the fiscal deficit for FY25.

CAN THE GOVERNMENT AGAIN FLATTER ON FISCAL DEFICIT IN FY25?

With the political uncertainty over and the new cabinet being constituted, the Million dollar question is how the government will use its additional revenue ammunition due to the RBI dividend largess. It may be recollected that for FY24, the government had first revised its fiscal deficit target from 5.9% to 5.8% of GDP. The actual numbers that were announced at the end of May 2024, brought the fiscal deficit to just 5.6% of GDP for FY24. The interim budget had reduced the fiscal deficit estimate for FY25 to 5.1% of GDP, but that was without assuming the RBI dividend largesse. Considering the higher ammunition from the RBI dividend, bigger dividends expected from the PSUs and also the robust direct and indirect tax revenues; the big question is what happens to the fiscal deficit for FY25?

While the government is playing its cards close to its chest, we may get a much clearer picture when the full budget is presented in late July 2024. While the government may not focus too much on fresh measures, it would like to lay out how it plans to use the additional resources and how the fiscal deficit is likely to pan out in FY25. One possibility is that the government may use the higher revenue boost to further cut the fiscal deficit to below 5.0% in FY25 and under 4.5% by FY26. That would be better than the original government estimates. However, the government may be cautious about very aggressive commitments considering that it is currently heading a coalition government. The second possibility is that the capex growth may be raised for FY25 from 11% to around 20%; still short of the 30% growth achieved in the last two fiscal years. The third possibility is that the government may use the money to sustain food subsidies and higher MSP for farmers, to hedge against the vagaries of the Kharif season. It could be a combination of the last two options.

STORY OF GOVERNMENT REVENUES UPTO MAY 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 comes into focus. The interim budget has already projected the FY25 fiscal deficit at 5.1% of GDP. How the government acts on shifting this number will depend largely on the revenue flows in FY25. Here is a quick update on government revenues as of the end of May 2024.

• Against the enhanced full year total receipts target of ₹30.80 Trillion, the central government has already achieved ₹5.73 Trillion of total receipts as of the end of May 2024. That is, 18.6% 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 ₹3.19 Trillion as of the end of May 2024, showing 12.3% target achieved. This figure is higher compared to the corresponding FY24 figure, but advance tax is not factored in yet.
• 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 ₹2.52 Trillion (63.0% of full year target) as of the end of May 2024. This is largely on account of the RBI dividend of ₹23.11 Trillion being accounted in May 2024. However, non-tax revenues are likely to be revised upwards in the full budget by more than ₹1 Trillion, so things could look more normal post July 2024.
• 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.

The flow of government tax revenues in FY25 is likely to be sharply higher than in FY24. That is what the high frequency signals like GST collections, e-way bills and freight volumes are suggesting. Let us now turn to how this money will be spent, and more.

STORY OF GOVERNMENT SPENDING UPTO MAY 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 May 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 May 2024, the total expenditure stood at ₹6.23 Trillion, or 13.1% 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 ₹4.80 Trillion as of the end of May 2024. That is 13.1% 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 ₹1.24 Trillion was paid out (net) as of May 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 ₹1.44 Trillion as of May 2024 or 12.9% 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 will have its impact for some more time. Also, the RBI dividend largesse could impel the government to go aggressive on capex once again in the full budget for FY25.

Capex will be one of the key items of interest in the full budget in July. After all, it is capex that has driven India to be the fastest growing largely economy globally, for 3 years in a row.

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 COVID related spending, but in the 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, and may be subject to further change in the full budget in July 2024. As of the end of May 2024, the fiscal deficit for the year stands at ₹50,615 Crore or 3.0% of full year target. It was 12.5% as of the end of April, but has come down sharply due to the fiscal surplus reported in May 2024, on account of the RBI dividend of ₹2.11 Trillion being reported in this month. Hence comparisons with previous fiscal year may be slightly odious.
• Revenue deficit target for FY25 has also been pegged sharply lower at ₹6.53 Trillion on the back of robust revenue flow expectations. As of the end of May 2024, the revenue surplus (that is correct) stood at ₹90,923 Crore. However, this surplus is again due to the RBI dividend of ₹2.11 Trillion being reported in the May 2024 revenues. As a result, the revenue account reported a surplus of ₹2,02,865 Crore for May and the cumulative FY25 revenue surplus as of May 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.

The focus will now shift to the full budget in July to see if the government is able to use the RBI dividend largesse to reduce the fiscal deficit further.

HOW FY25 FISCAL DEFICIT WAS FUNDED AS OF MAY 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 ₹50,615 Crore (3.0%) as of the end of May 2024. As of May 2024, the fiscal deficit has been almost entirely funded by the RBI dividend. However, for the full year, 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).

We are not looking at the break-up of the actual fiscal deficit as of the end of May, as it is largely distorted due to the impact of the RBI dividend. However, the bigger question is whether the government will try and cut this fiscal deficit further in the full budget in July 2024. Among other things, the government may not want to over-promise and under-deliver. It would prefer to keep it the other way round!