May 2023 Fiscal Deficit comes in at 11.8% of full year target

1 Jul 2023 , 01:52 PM

As of the close of June, the CGA published the fiscal deficit data for May 2023. Last year, i.e., FY23, the total fiscal deficit had been pegged in the Union Budget at 6.4% and the actual fiscal deficit came in slightly lower at 6.32%. This also paves the way for a sharply reduced fiscal deficit target 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, the government has in the last few years spent more than budgeted on the capex side, even at the cost of revenue spending.

Fiscal deficit target achieved in FY23, but FY24 could be challenging

In FY23, the fiscal deficit target was easily achieved due to the buoyant revenues. As a result, the eventual fiscal deficit was at around 6.32% of GDP against the budget target of 6.4%. For FY24, the Union Budget has cut the fiscal deficit to 5.9% of GDP. However, this target could face a few practical challenges in FY24. Firstly, the tax revenues are expected to stagnate or, at best, grow at a marginal rate over last year. That is because, the global hawkishness is expected to trigger a slowdown in global economies, hitting exports. 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. Any worsening of the geopolitical situation in Russia could again lead to oil prices spiralling and the subsidy bill again going up. Thirdly, 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 inevitable considering elections are coming up in less than a year from now. 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. Let us now take a granular look into the break-up of revenues and expenditure of the government as of the end of May 2023.

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

With data up to the end of May 2023 in place, we have an evolving picture of how the revenues are panning out in FY24 vis-à-vis the targets. Revenue flows in FY24 are seeing good traction non 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 May 2024.

• Against the full year total revenue target of Rs27.16 trillion, the central government has achieved Rs4.16 trillion of revenues as of the end May 2023. That is, nearly 15.3% of full year revenue target, which is a comfortable position to be in.

   

• 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 Rs2.78 trillion as of the end of May 2023, showing 11.9% achieved. It is perceptibly slower than last year.

   

• 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.

   

• For FY24, the target for non-tax revenue stood at Rs3.02 trillion of which the centre achieved Rs1.35 trillion (44.6%) as of end of May 2023. This percentage is misleading 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 but achieved just 3.6% 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 May 2023. Clearly, global pressures are showing on tax flows.

Tracking government expenditure dot plot as of May 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 May 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 May 2023, the total expenditure stood at Rs6.26 trillion, or 13.9% of the full year target. Despite the pressures, government has kept expenditure within the budgeted limits.

   

• Revenue expenditure, which is targeted at Rs35.03 trillion for FY24 has seen actual spending to the tune of Rs4.58 trillion as of the end of May 2023. That is 13.1% 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.

   

• Out of the revenue spending, interest payment target for FY24 stands at Rs10.80 trillion of which Rs1.11 trillion was paid out in FY23. 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.

   

• Capital spending for the full year FY23 is targeted at Rs10.00 trillion of which the government has achieved capex of Rs1.68 trillion for FY23 or 16.8%. Not only has the capital spending budget grown by 50% over last year, but the government has spent 16.8% by close of May showing aggression in capex spending.

To sum up the spending story, despite the constraints and global headwinds, the government has not allowed the capex commitments to get affected. Subsidy spending on food and fertilizers is what needs to be watched out for.

The story of three deficits in FY24

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 borrowings go towards meeting the revenue gap of the government too. 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 Rs17.84 trillion and as of the end of May 2023, the fiscal deficit for the year stands at Rs2.10 trillion or 11.8% of the full year fiscal deficit target. 

   

• On revenue deficit, the annual target is Rs8.70 trillion for FY24. As of the end of May 2023, the revenue deficit stood at Rs0.46 trillion or 5.2% of full year target. The revenue deficit to fiscal deficit ratio is also under control at 21.63%.

   

• 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 Rs1 trillion as of the close of May 2023 or 14.1% of the full year target.

To sum it up, the fiscal deficit, revenue deficit and the primary deficit are on target. While the fiscal deficit is flat in absolute on yoy terms, the revenue deficit and primary deficit target are sharply lower than FY23. That is a very positive signal.

How was the FY24 fiscal deficit funded up to May 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 2.10 trillion fiscal deficit achieved till the end of May 2023, domestic financing accounted for the bulk of Rs2.06 trillion while international financing was the balance amount. Out of the Rs2.06 trillion of domestic financing, market borrowings account for Rs1.83 trillion, with the balance coming 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.