June 2023 Fiscal Deficit leaps to 25.3% of full year target

1 Aug 2023 , 10:21 AM

The data on fiscal deficit and revenue deficit is disclosed each month by the Controller General of Accounts (CGA), and it is published with a lag of one month. As of the close of July , the CGA published the fiscal deficit data for June 2023 along with the cumulative data for the first 3 months of FY24. In the previous fiscal of FY23, the central fiscal deficit (CFD) had been pegged in the Union Budget 2022-23 at 6.4%. The actual fiscal deficit for FY23 actually came in marginally lower at 6.32% of GDP. This also paves the way for the Finance Ministry to get more aggressive and target a sharply reduced fiscal deficit of 5.9% for FY24. The reduced fiscal deficit target at 5.9% of GDP assumes robust direct and indirect revenues as well as reduction in subsidies. However, it must be noted here that the government has, in the last couple of years, spent more than budgeted on the capex side, even at the cost of revenue spending. The logic, and rightly so, appears to be that due to the externalities and the multiplier effect of government capex spending, it should not be compromised.

Fiscal deficit target achieved in FY23, but FY24 is building rapidly

In FY23, the fiscal deficit target was easily achieved due to a variety of factors. There were buoyant revenues from direct and indirect taxes, which more than made up for the shortfall in divestment revenues. In the current fiscal year FY24, there has been a surge in the RBI dividend to the central government while the target for disinvestment itself is quite small. It remains to be seen how the aggressively lower target of fiscal deficit at 5.9% is achieved in the year FY24. After all, a 50 bps fall in fiscal deficit as share of GDP is not going to come easy. In Fy24, the target could face a few practical challenges. Firstly, the tax revenues are expected to stagnate or, at best, grow at a marginal rate over last year due to weak rural demand and pressure on exports. That is because, the global hawkishness is expected to trigger a slowdown in global economies; hitting tech spending and exports to the developed markets. That is already visible in the last few months.

Secondly, while the subsidy bill has shown signs of receding, that has always been a grey area. Oil has shot up from $70/bbl to $85/bbl and at some point in the future, the government may have to get back to offering oil price subsidies to the consumers at large. Thirdly, it is quite clear now that the government is unlikely to relent on capex in this year and one can also expect higher outlays on defence and on sops to individuals. That is looking likely considering elections are coming up in less than a year from now and there is also a slew of critical state elections in between. There are some positives too. The RBI dividend to the government has been nearly twice the budgeted amount and asset monetization is also likely to make a bigger contribution. We now move over and take a granular look into the break-up of revenues and expenditure of the government as of the end of June 2023.

How did the government revenues pan out as of the end June 2023

With data up to the end of June 2023 (one full quarter) in place, we have an evolving picture of how the revenues are panning out in FY24 as compared to the targets. Revenue flows in FY24 are seeing good traction; both on the tax front and also on the non-tax revenue front. Here are some key takeaways on the revenue front as of the close of June 2024.

• Against the full year total revenue target of Rs27.16 trillion, the central government has achieved Rs5.99 trillion of revenues as of the end June 2023. That is, nearly 22.1% of full year revenue target, which is a comfortable position to be in at the end of one quarter.

   

• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the full year target for net tax revenues (net of refunds and devolvement) at Rs23.31 trillion, the government has achieved net tax revenues of Rs4.34 trillion as of the end of June 2023, showing 18.6% target achieved. This is perceptibly slower than last year, but that should be ok as far as the full year numbers are on target.

   

• Net 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 FY24, the target for non-tax revenue stood at Rs3.02 trillion of which the centre achieved Rs1.55 trillion (51.4%) as of end of June 2023. This percentage looks high as it includes the Rs87,416 crore dividend received by the government from RBI for FY23.

   

• On the subject of non-debt capital receipts, the government had set a target of Rs84,000 crore and has achieved 12.7% of the target. This should pick up momentum once the divestments and the strategic sales revenue start flowing in.

To sum it up, the government flow of government tax revenues in FY24 has been slower than FY23, as of the end of June 2023. It shows some pressure on corporate top lines.

Tracking government expenditure dot plot as of June 2023

India has traditionally been a country that has run a deficit; at a fiscal level and at revenue level as expenditures consistently exceeded revenue levels. That gap was met by borrowings (fiscal deficit). Let us first look at government spending for FY24 till the end of June 2023.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at Rs45.03 trillion for the full year FY24. As of the end of June 2023, the total expenditure stood at Rs10.51 trillion, or 23.3% of the full year target. Despite the pressures, government has kept expenditure in line with the budgeted limits.

   

• Revenue expenditure, which is targeted at Rs35.03 trillion for FY24 has seen actual spending to the tune of Rs7.72 trillion as of the end of June 2023. That is 22.0% of full year target. Government has gone slow on non-essential revenue spending, and even the budgeted growth over last year has been extremely conservative. It is on target.

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs2.44 trillion was paid out as of the first quarter of 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. Many of them tend to be fairly sticky heads of expenditure.

   

• Capital spending for the full year FY24 is targeted at Rs10.00 trillion of which the government has achieved capex of Rs2.78 trillion for FY24 or 27.8%. Not only has the capital spending budget grown by 50% over last year, but the government has spent 27.8% by close of June, indicating that actual spend could overshoot the budget target.

To sum up the spending story, despite the constraints and global headwinds, the government has not allowed its budgeted capex commitments to get affected. Subsidy spending on food and fertilizers is what needs to be watched out for. However, with food inflation rising this year, food subsidy bill could actually overshoot the target.

What is the updated narrative on the 3 deficits in FY24

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows are not sufficient to meet the outflows. Hence some borrowings go towards meeting the revenue gap of the government too. That is like borrowing for your morning breakfast and the fiscal deficit is less serious a problem. Here is a sneak peek at the 3 most critical deficits.

• The fiscal deficit (budget deficit) for the full year FY24 has been pegged at Rs17.87 trillion and as of the end of June 2023, the fiscal deficit for the year stands at Rs4.51 trillion or 25.3% of full year target. It has jumped sharply from 11.8% in May 2023.

   

• On revenue deficit, the annual target is Rs8.70 trillion for FY24. As of the end of May 2023, the revenue deficit stood at Rs1.84 trillion or 21.1% of full year target. The revenue deficit to fiscal deficit ratio has spiked from 21.63% to 40.67% in one month.

   

• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That is targeted for FY24 at Rs7.07 trillion, and stands at Rs2.08 trillion as of the close of June 2023 or 29.4% of the full year target. That is a sharp spike in June 2023.

To sum it up, the fiscal deficit, revenue deficit and the primary deficit are on target, but the spike over the previous month is quite sharp in the month of June 2023. It really remains to be seen how effectively the government is able to contain its central fiscal deficit (CFD) within the 5.9% target for FY24.

How was the FY24 fiscal deficit funded up to June 2023

The challenge with fiscal deficit is that it has to be funded (typically with borrowings) so that the budget is balanced. Out of the Rs4.51 trillion fiscal deficit achieved till the end of June 2023; domestic financing accounted for the bulk of Rs4.47 trillion while international financing was the balance amount. Out of the Rs4.47 trillion of domestic financing, market borrowings account for the bulk of Rs4.03 trillion. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. However, the government has already confirmed that it would not be increasing its borrowing target for the year FY24. It remains to be seen how the government is able to stick to its word on borrowings and also its target of 5.9% fiscal deficit for FY24.