Why 5.9% Fiscal Deficit target could be a problem

Fiscal Deficit at 5.9% may be tough in FY24

Unlike in FY23, when the fiscal deficit was increasing at a very gradual pace, the current fiscal, FY24, has seen the fiscal deficit galloping at a rapid pace. For starters, fiscal deficit is that portion of the total budgeted government spending that cannot be met through revenue flows. There is a central fiscal deficit and each state has its fiscal deficit. 

However, for simplicity, here we shall only dwell on the central fiscal deficit (CFD). So, fiscal deficit is the amount that the government needs to raise through market borrowings or through small savings. Essentially, the fiscal deficit represents the total borrowing of the government, which means the fiscal deficit has to be funded. How was it funded?

Funding the Fiscal Deficit for FY24

The budgeted fiscal deficit for FY24 stands at Rs17.87 trillion (1 trillion is equal to 1 lakh crore). As of end July 2023, India has already touched 33.9% of the full fiscal deficit target at Rs6.06 trillion. India has touched fiscal deficit of Rs6.06 trillion (33.9%) by July 2023. The challenge with fiscal deficit is that it has to be funded (with borrowings) so that the budget is balanced. Out of the Rs6.06 trillion fiscal deficit; domestic financing accounted for the bulk of Rs5.98 trillion, with balance from international financing. 

Out of Rs5.98 trillion of domestic financing, market borrowings account for the chunk at Rs5.58 trillion. The fiscal gap funding came from small savings, provident funds, and other national savings schemes. For now, the government has underlined that it would not raise the fiscal deficit for FY24 from 5.9% but that is going to be a lot of pressure considering the pressure on tax revenues and also considering the aggression shown by the government in capital spending.

Fiscal Deficit FY24 versus FY23

The Controller General of Accounts (CGA) normally publishes the fiscal deficit update with a gap of 1 month. That means, the updated fiscal deficit upto July, gets published on the last day of August 2023. In FY24, the fiscal deficit has been increasing at a rapid pace, compared to FY23. That is due to a combination of subdued revenue growth and rapid capex spending in the current year.  The central elections are due in less than a year and there is a slew of state elections scheduled over the next 12 months. 

Obviously, the government spending is going to automatically be on the rise. In FY23, fiscal deficit had been pegged at 6.4% and the government actually did better at 6.32%. That had made the government ambitious enough to reduce the fiscal deficit target to 5.9% of GDP in FY24. However, this assumes robust direct and indirect tax flows and reduction in subsidies. But, capex is likely to overshoot and while fertilizer subsidies may be cut, food and fuel subsidies may still be an issue. 

50 Bps lower Fiscal Deficit could be tough in FY24

During the COVID pandemic, the government had overshot on the fiscal deficit as part of its reforms package to boost income levels. That has left an enduring cost on the economy in the form of higher fiscal deficit. FY24 has some positives on the fiscal deficit and a number of challenges. Let us look at the positives first. The RBI dividend to the government paid this year was more than twice the budgeted amount. That is going to be a positive for central government finances. High frequency data on GST collections, core sector growth, PMI and e-way bill collections hint at robust tax collections. However, we are talking about a larger base in FY23 on which to grow. The other positive that one can bet on for FY24 is that the asset monetization under the Gati Shakti would be much higher than expected.

However, there are challenges too. The progress on the disinvestment front has been disappointing and the IDBI Bank divestment is also likely to be pushed off to next fiscal. Despite robust tax collections, the growth over FY23 could be flat or marginally higher due to the strong base. Then there is the sustained overhang of a global slowdown, which has already hit the demand for Indian goods and services. In India, rural demand has been hit by erratic rains and weak Kharif output. The government is likely to save on fertilizer subsidies this year, but that could be offset by other subsidies. Government has already committed that free food outlays will continue well into middle of next year. At the same time, crude oil is nearing $90/bbl in the Brent market and that could trigger the need for fuel subsidies.

Government revenues and spending: is it on target?

Let us look at some of the key takeaways for FY24 on the revenue and expenditure front as of end July 2023.

• As of end of July 2023, the central government has achieved total revenues of Rs7.75 trillion against full year total revenue target of Rs27.16 trillion. That is 28.5% in 4 months. Net tax revenues at Rs5.83 trillion are, however, just 25% of the full year target. There is pressure on the direct and indirect tax collections in terms of revenues.
  
   
• What about non-tax revenues? For FY24, the government achieved Rs1.79 trillion against the target of Rs3.02 trillion. However, this 59.3% target achievement is skewed due to the Rs87,416 crore bumper dividend paid to the government by RBI for FY23.
  
   
• Let us turn to the expenditure side. On the revenue expenditure front, out of the FY24 target of Rs35.03 trillion, actual spending has been Rs10.64 trillion as of July 2023, or 30.4%. Interest and administrative payouts have increased. But the real surge has happened in capital spending. Against the FY24 target of Rs10.00 trillion, the government achieved capex of Rs3.17 trillion till July 2023; or 31.7%. However, this is on a capex budgeted that has been enhanced 50% over FY23. That will have strong externalities, but it is still a cost to be provided for and will impact fiscal deficit.

So, how do we sum up the fiscal deficit story for FY24 so far? As of July 2023 end, the government has touched 33.9% of full year fiscal deficit target and 34.7% of full year revenue deficit. The real problem is that the ratio of revenue deficit to fiscal deficit has spiked from 21.63% to 49.90% in just 2 months. That is what the government has to keep a watch on.