Fiscal Deficit at 63.6% of FY24 target after 10 months

1 Mar 2024 , 09:17 AM

Fiscal deficit is growing, but slowly

The fiscal deficit data, along with the statement of government accounts for the first 10 months of FY24 up to January 2024 was published by the Controller General of Accounts (CGA) on the last working day of February 2024. This data is normally published with a lag of one month. The fiscal deficit had shown a rapid increase in June and July 2023 as the government spent heavily to contain food inflation and paying out the higher minimum support prices (MSP) committed. The food subsidies also were a drag on the finances of the government. However, since then, the fiscal deficit has moved in a very calibrated way.

The growth in fiscal deficit has tapered in the 6 months since August 2023 as the centre has been wary of the fiscal deficit spilling over. Fiscal deficit as a percentage of full year target rose from 33.9% to 36% in August 2023; 36% to 39.3% in September 2023 and from 39.3% to 45% in October 2023. In November, the fiscal deficit increased from 45% to 50.7% while as of December 2023 close, fiscal deficit moved up from 50.7% to 55.0% of the full year fiscal deficit target. In the latest updated ending January 2024, the fiscal deficit has moved from 55.0% to 63.6% of the GDP. It now looks like the government can actually meet the aggressive 5.8% fiscal deficit target for FY24 (revised lower in Budget 2024-25).

In a sense, Budget 2024-25 redefined the fiscal deficit story

It is not often that a Union Budget redefines the fiscal deficit story. More than 18 year back, the Union Budget had revamped the fiscal deficit narrative by introduce the FRBM Act, which has since been the gold standard for fiscal responsibility. It is in this context that the interim budget announced by the finance minister on February 01, 2024 assumes importance. It managed the delicate balance between capex and fiscal deficit control.

• In the Union Budget 2024-25, the finance minister took an aggressive step to cut the central fiscal deficit from 5.9% to 5.8% of GDP. That comes at a time when the markets and the economists were wondering if the government would be able to meet its 5.9% target. With the nominal growth under pressure, how did the government get the confidence to reduce the fiscal deficit target so aggressively? The tax buoyancy was at 1.4X against the expectation of 1.2X, and that made the big difference to the overall tax collections. The impact of that tax buoyancy is expected to help in FY25 also.

   

• Fiscal responsibility is about giving confidence on the glide path. To that effect, the interim budget cut the FY25 fiscal deficit target to 5.1%. This is sharply lower than the street estimates of 5.3% to 5.5% for FY25, clearly surprising the markets for good. It has even gone ahead and guided that the fiscal deficit would be much lower than 4.5% of GDP by FY26; beating its own aggressive glide path by a margin.

   

• What is more gratifying is that the fiscal deficit has been checked without compromising on capex in FY25. One can argue that capex at ₹11.11 Trillion is just about 11.1% higher than FY24; compared to the lofty 30% growth in the previous years. But we have to take the larger base into consideration and also the fact that capex has a lag effect and a multiplier effect that lasts for several years. It should still make a positive difference.

For the government, the March 2024 quarter would be challenging due to global Red Sea turmoil and the higher implied crude oil prices. However, India being a domestic market driven economy, these global risks could be automatically hedged.

Fiscal deficit is a very delicate trade off

When the government announced the aggressively lower fiscal deficit target at 5.1% for FY25, it was always evident that this is not the final number. The full budget presented in July may even go lower to 5.0%, which would be an amazing achievement and position the Indian economy to actually reach well below the targeted 4.5% fiscal deficit as a share of GDP in FY26. But that is still into the future. The focus here is on the trade-offs. The trade-off for the government was between capital spending and fiscal deficit. Can the government put off the capex engine for the sake of containing the fiscal deficit.

Fortunately, the government has done nothing like that. The latest data on fiscal deficit shows that even in Budget 2024-25, the capex has been increased by over 11%, which comes on top of 30% hike in capex for 2 years in succession. If you consider the lag effect and the multiplier effect of the last 3 years, the net effect is still going to be substantially productive. The higher capex has been funds by cuts in revenue spending, which was long called for. However, despite the trade-offs, the path to fiscal prudence has been steady.

How government revenues panned out as of end January 2024

With data up to the end of January 2024 available, we have an evolving picture of how the revenues panned out in FY24 against annual targets. Revenue flows in FY24 are seeing good traction. Here are some key data points.

• Against the enhanced full year total receipts target of ₹27.56 Trillion, the central government has already achieved ₹22.52 Trillion of revenues as of the end of January 2024. That is, 81.7% of full year revenue target, which is marginally better when compared with the similar period in FY23.

   

• Let us now turn to the break-up of the revenues and focus on the net tax revenues first. Against the slightly reduced full year target for net tax revenues (net of refunds and devolvement) at ₹23.24 Trillion, the government has achieved net tax revenues of ₹18.80 Trillion as of the end of January 2024, showing 80.9% target achieved. This figure is at par with the corresponding FY23 figure.

   

• 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 FY24, the target for non-tax revenue stood sharply hiked at ₹3.76 Trillion of which the centre achieved ₹3.38 Trillion (90.0%) as of end of January 2024. The sharp revenue upgrades on this front are largely from the better than expected revenues from monetization of assets like roads and mines in the current fiscal. This is covered under the header of Economic Services.

   

• On the subject of non-debt capital receipts, the government reduced the target to ₹56,000 Crore due to tepid performance on the disinvestment front. It has achieved 61.1% of the target. However, this has been largely compensated by the better than expected non-tax revenues this year.

To sum it up, the government flow of government tax revenues in FY24 is at par with the comparable period in FY23. While disinvestments have disappointed, it is the monetization of assets like mines and roads that has been truly robust.

How government spending looks like as of January 2024?

India has traditionally run a deficit; at a fiscal level and at revenue level as spending has always exceeded receipts. That gap was filled by borrowings (fiscal deficit). Here is how government spending for FY24 looked as of the end of January 2024.

• Total expenditure, comprising of revenue expenditure and capital expenditure, is targeted at a reduced ₹44.90 Trillion for the full year FY24. As of the end of January 2024, the total expenditure stood at ₹33.55 Trillion, or 74.7% of full year target. In FY24, the spending is marginally lower than comparable period in FY23 due to revenue spending checks imposed by the government.

   

• Revenue expenditure, which is targeted at a higher ₹35.40 Trillion for FY24 has seen actual spending to the tune of ₹26.34 Trillion as of the end of January 2024. That is 74.4% of full year target. That is slightly lower than comparable period last year.

   

• Out of the revenue spending, interest payment target for FY24 stands at a lower ₹10.55 Trillion of which ₹8.22 Trillion was paid out as of January 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. 

   

• Capital spending for the full year FY24 is targeted at a slightly lower ₹9.50 Trillion of which the government has achieved capex of ₹7.21 Trillion as of January 2024 or 75.9% of full year budget. With the base being reduced for FY24, the actual growth in FY25 should be higher than the budgeted 11.1%

The government has not allowed capex commitments to slow down in to a small extent, although it may not have a substantial impact. The strategy of not compromising on capex commitments is what is making the growth story sustainable. However, the lowering of capex in FY24, will imply higher growth of capex in FY25.

Tale of 3 deficits: Fiscal, Revenue and Primary

India runs deficits at multiple levels. It runs a revenue deficit since the revenue inflows fall short of the revenue spending. The bigger challenge is reining in the fiscal deficit (Budget Deficit) as it also has debt and interest rate implications, as the fiscal gap is substantially met through market borrowings. Here is a quick look at the 3 most critical deficits.

• The fiscal deficit (budget deficit) for the full year FY24 has been now pegged lower at ₹17.35 Trillion and as of the end of January 2024, the fiscal deficit for the year stands at ₹11.03 Trillion or 63.6% of full year target. The frenetic accretion to fiscal deficit between May and July has shifted to a more gradual growth; as revenue spending is slowing. The government has also marginally cut down on the capex, even as inflows have remained robust. That has kept borrowings also under check.

   

• Revenue deficit target is also reduced to ₹8.41 Trillion for FY24. As of the end of January 2024, the revenue deficit stood at ₹4.16 Trillion or 49.4% of full year target. The critical ratio of Revenue deficit to fiscal deficit ratio had fallen from 49.90% in July 2023 to 44.25% in August 2023 and further to 32.97% in September 2023. It rose marginally to 34.81% in October 2023 and further to 38.21% in November 2023; but has again fallen to 34.44% of fiscal deficit in December 2023 due to the revenue surplus. As of the close of January 2024, the revenue deficit as a share of fiscal deficit stands at 37.70%.

   

• Finally, we come to primary deficit, which is the fiscal deficit excluding interest costs. That target has been lowered for FY24 to ₹6.79 Trillion, and stands at ₹2.81 Trillion as of the close of January 2024 or 41.3% of full year target. 

To sum up, the fiscal deficit, revenue deficit and the primary deficit are on target as of January 2024 and the revenue deficit target has also been reduced in tandem with the reduction in the fiscal deficit target. 

How FY24 fiscal deficit was funded up to January 2024

Out of the total fiscal deficit target of ₹17.35 Trillion for FY24, India has touched fiscal deficit of ₹11.03 Trillion (63.6%) as of the end of January 2024. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the ₹11.03 Trillion fiscal deficit till the end of January 2024; domestic financing accounted for the bulk (97.06%) at ₹10.70 Trillion while international financing and investment redemptions made up the residual amount. 

Out of the ₹10.70 Trillion of domestic financing, market borrowings accounted for the biggest chunk of 94.06%. The balance funding of the fiscal gap came from small savings, provident funds, and other national savings schemes. The fiscal deficit target of 5.9% of GDP for FY24 has already been cut to 5.8% while the FY25 fiscal deficit target has been cut to 5.1%. For the final word, we still need to await the final budget by the new government.