Fiscal deficit for FY23 well in control

Fiscal deficit for FY23 better than expected

One of the big data points announced recently was the fiscal deficit for the full year. Now, the fiscal deficit is the budget gap that the government has to fund through the borrowing route. Till the COVID pandemic of 2020, the RBI had kept the discipline of 3.5% to 4% fiscal deficit to GDP ratio, as required by the FRBM (Fiscal Responsibility and Budget Management) Act. However, in 2020-21, the RBI overshot the fiscal deficit to over 9% of GDP. For FY23, the fiscal deficit target had been lowered to 6.4% of GDP but there were concerns if that would be achieved. Based on the data put out by the Controller General of Accounts (CGA), India closed FY23 with a fiscal deficit at 6.32% of GDP, 8 bps better than the budget estimates. This raises hopes that the FY24 target of 5.9% of fiscal deficit to GDP ratio should be perfectly achievable. 

What helped government keep fiscal deficit limit in FY23

The final fiscal deficit as a share of GDP for FY23 was 6.32% compared to the target of 6.4% in the Union Budget. The bounce in the economy held the day as was evident from the Q4 GDP growth of 6.1%, and full-year FY23 GDP growth of 7.2%. But this entire growth story meant that revenues were much better than expected and that was a big boost. Consider these revenue numbers.

• In FY23, the total revenues of the central government stood at Rs23.84 trillion against the total revenue target of Rs23.48 trillion. In short, the government achieved nearly 101.5% of full-year revenue target. That surely helped contain the fiscal deficit.
   
• Let us now turn to the biggest component of tax revenues for the government. For FY23, the tax revenues stood at an impressive Rs20.97 trillion against the budget target of Rs20.87 trillion, which is nearly 100.5% of the full-year target.
   
• There was a lot of robustness in the non-tax revenues too in the year. For instance, the Union budget had set FY23 non-tax revenue target at Rs2.62 trillion but the central government actually achieved Rs2.86 trillion, or 109.3% of the budget. The boost to non-tax revenues came from higher-than-expected interest and dividend receipts.

um it up, the government has done better than expected on tax revenues and non-tax revenues, although disinvestments fell short of expectations, amid tough market conditions.

Government spending veered towards capex

Even as the fiscal deficit continues to be high in absolute terms, there are some encouraging signals on the expenditure front. The government did attempt expenditure cuts in the last quarter to keep fiscal deficit in check. However, the idea was that capex was not compromised. Here are two interesting data points to underscore this point.

• Revenue expenditure (you can call it the economy maintenance expenditure), was targeted at Rs34.59 trillion for FY23 but the actual spend was slightly lower at Rs34.53 trillion only. That means, the government spent just about 99.8% of full year target for revenue spending. What is the secret here? The government has gone slow on non-essential revenue spending, but more importantly, that was used to protect capital spending needs of the economy. That is the next point.
   
• Capital spending for the full year FY23 was originally targeted at Rs7.28 trillion in the Union Budget. However, the government has achieved capex of Rs7.36 trillion for FY23, which is more than the budget estimates. The government has a clear internal mandate to ensure that capital spending was not hampered. After all, capital spending has strong externalities and hence the impact of the same is a lot more far reaching. The decision is likely to have a positive multiplier effect on economic growth. 

The real story on spending is not in the overall spending but in how the revenue spending was to subsidize capex spending. This is despite heavy subsidies being offered for food and fertilizers. 

A Tale of 2 deficits: fiscal and revenue deficit

India runs deficits on multiple counts. It runs a revenue deficit since the revenue inflows are not sufficient to meet the revenue outflows. Obviously, when it runs a revenue deficit, it would run a capital deficit also. Here are how the two deficits panned out. 

• The fiscal deficit (budget deficit or the budget gap) for FY23 had been pegged at Rs17.55 trillion in the Union Budget. As of the end of FY23, the fiscal deficit for the year stood at just Rs17.33 trillion. To cut a long story short, the full-year fiscal deficit for FY23 closed at 6.32% of the GDP against the 6.4% target. This got a boost from higher revenues and also from higher GDP base.
   
• Let us now turn to the revenue deficit which is like borrowing for your morning breakfast. On revenue deficit, the annual target was Rs11.11 trillion while the actual revenue deficit for the fiscal FY23 stood at Rs10.69 trillion, or just about 96.2% of the target. One of the critical ratios pertaining to revenue deficit is the ratio of the revenue deficit to fiscal deficit. That was also relatively under control at 63.3%.

Can the government meet 5.9% fiscal deficit in FY24?

That is the million-dollar question. FY24 is likely to see overall revenue flattening out as a global slowdown is likely to impact tax revenues in the year. It remains to be seen how the government will achieve the 5.9% fiscal deficit target. However, subsidies bill should be sharply lower and the RBI has started off with a bang transferring a surplus of Rs87,416 crore to the government as a dividend. That is nearly 3 times the budget estimates and will go a long way in cutting the fiscal deficit target to 5.9% for FY24. That is assuming there are no negative surprises! 

Content Source: Controller General Of Accounts (CGA)