January 2023 Fiscal deficit just 67.8% of full year target

1 Mar 2023 , 09:32 AM

It may be recollected that in Union Budget 2022-23, announced in February 2022, the government had announced a rather conservative fiscal deficit of 6.4% of GDP. With the overall fiscal deficit at just 67.8% of the full year absolute target, it raises the chances of the Indian government closing the fiscal deficit for FY23, well within the set target of 6.4%. 

One can argue that the last 2 months normally put the maximum pressure on fiscal deficit, but with a 32.2% leeway it bodes well for the fiscal deficit target for FY23. Not only does the 6.4% target for FY23, now looks achievable, it may even induce the government to revise its fiscal deficit target for FY24 lower from 5.9% as stipulated in the February 2023 Union Budget. For now, it looks like the government strategy has certainly paid off.

How did the revenues pan out in FY23?

One of the factors that has been a key driver for the government keeping fiscal deficit under control in FY23 has been the robust revenue flows. Revenue flows in FY23 so far have been largely driven by robust direct tax and indirect tax flows and with 2 months to go for FY23 it is only likely to get better. Here are key takeaways on the revenue front.

• Against the full year total revenue target of Rs23.84 trillion, the central government has achieved Rs19.20 trillion of revenues as of the end of January 2023. IN short, 81.7% of the full year revenue target has been achieved with two months of FY23 still to go.

   

• For the full year FY23, the target for net tax revenues (net of refunds and devolvement) has been pegged at Rs20.87 trillion, of which tax revenues of Rs16.89 trillion has been achieved as of the end of January 2023, showing an achievement ratio of 80.9%.

   

• The net revenues above comprise largely 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.

   

• For the first full year, the target for non-tax revenue stands at Rs2.62 trillion of which the centre has achieved Rs2.31 trillion as of the end of January 2023. Non-tax revenues predominantly comprise of dividends, interest and capital payout by the RBI.

   

• For FY23, the central government also has a target of Rs60,000 crore from disinvestment and the strategic sale of PSU companies. However, as of the end of January only Rs38,671 crore has been achieved. However, if the Hindustan Zinc sale goes through in this year, then the annual target would be easily achieved by the government.

Tracking Expenditure dot plot for FY23

India has traditionally been a country that has run a deficit not only at a fiscal level but also at a revenue level. That is because the expenditure has far exceeded the income levels, so the gap had to be met with borrowings. That is what the fiscal deficit is all about. But first let us look at how the spending has panned out in FY23.

• Total expenditure, comprising of revenue expenditure and capital expenditure, was targeted at Rs41.87 trillion for the full year FY23. As of the end of January 2023, the total expenditure stands at Rs31.68 trillion, or nearly 75.7% of the full year target. That leaves a fairly comfortable leeway for the government to stay within its spending limits.

   

• Revenue expenditure, which was targeted at Rs34.59 trillion for FY23 has seen total spending to the tune of Rs25.98 trillion as of the end of January. That is 75.1% of the full year target, and the government may look to go slow on non-essential spending to save more room for capital spending, as has been the trend in the last couple of years.

   

• Out of the revenue spending, interest payment target for FY23 stands at Rs9.41 trillion of which Rs7.39 trillion has already been paid as of the end of January 2023, so just about 21% of the total full year interest bill is still left to be defrayed.

   

• Capital spending for the full year FY23 is targeted at Rs7.28 trillion of which the government has already completed capex of Rs5.70 trillion as of the end of January 2023. Although 78% of the capex is done, the government may look to shift funds from the revenue spending budget to the capex budget, as committed in Union Budget FY24.

   

• For the first 10 months of FY23, the major items of revenue spending include farm subsidies, fertilizer subsidies, food and PDS subsidies, defence spending, government salaries, pensions etc. On the capital spending side, the major outlays for the government are telecom sector capex, atomic energy capex, defence sector capex and capital transfer to the states for supporting capex.

How then do the deficits look for FY23?

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows are not sufficient to meet the revenue outflows. Hence some of the borrowings also go towards meeting the revenue gap of the government. Here let us look at three of the most important deficits in the central government accounts from a macro perspective.

• The fiscal deficit (budget deficit) for the full year FY23 has been pegged at Rs17.55 trillion and as of the end of January 2023, the fiscal deficit for the year stands at Rs11.91 trillion. In other words, the current fiscal deficit as of January 2023 stands at 67.8% of the full year target. That gives hope that the fiscal deficit should stay within the 6.4% target for FY23.

   

• We turn to the revenue deficit, which is like borrowing for your morning breakfast. Out of the total annual target of Rs11.11 trillion of revenue deficit, a revenue deficit of Rs6.78 trillion has been achieved for FY23 hinting at 61% of the full year limit utilized. The ratio of revenue deficit to fiscal deficit stands as of January 2023 stands at 56.95%.

   

• Finally, the primary deficit, the fiscal deficit excluding the interest effect was targeted at Rs8.15 trillion for the full year. It stands at Rs4.52 trillion as of January 2023 or just about 55.5% of the full year target.

How has the fiscal deficit been funded in FY23?

The challenge with fiscal deficit is that it has been funded (typically with borrowings) so that the budget is eventually balanced. Out of the 11.91 trillion fiscal deficit achieved till January 2023, domestic financing accounted for Rs11.64 trillion while international financing was just about Rs0.27 trillion. Out of the Rs11.64 trillion of domestic borrowings, market borrowings account for a whopping Rs10.06 trillion, while the balance of Rs1.58 trillion was accounted for by small savings, provident funds and other national savings schemes.

One of the reasons, the fiscal deficit problem may be around for some more time is the sharply higher subsidy bill. For FY23, the budgeted major subsidy bill stands at Rs5.22 trillion of which Rs3.99 trillion (77%) has been utilized in the current year. Out of the Rs5.22 trillion budgeted subsidies, food subsidy is Rs2.87 trillion, urea subsidy is Rs1.54 trillion, nutrient subsidy is Rs0.71 trillion and petroleum subsidy is a minor Rs0.09 trillion. While the fertilizer subsidy (for rabi and kharif) has utilized 92% of full year target as of January 2023, food subsidy utilization at 67% is much lower. The good news is that FY23 promises to be a year when fiscal deficit would be finally under control and within the set target.