India’s Fiscal Deficit Widens to 33.9% of FY24 Target in April-July 2023

India’s fiscal deficit during April-July 2023 stood at Rs 6.06 lakh crore, accounting for 33.9% of the full financial year target, according to the latest official data released on Thursday. This marks a significant increase from the 20.5% reported in the comparable year-earlier period. Fiscal deficit, which represents the gap between the government’s total expenditure and revenue, serves as an indicator of the government’s borrowing needs.

The data reveals that total receipts during April-July amounted to Rs 7.75 lakh crore, while overall expenditure stood at Rs 13.81 lakh crore. These figures represent 28.5% and 30.7% of the full FY24 budget target, respectively.

Aditi Nayar, chief economist and head (research and outreach) at ICRA, said, “The Government of India’s fiscal deficit jumped to Rs 6.1 trillion or 34% of the FY2024 BE in April-July FY2024 from Rs 3.4 trillion in the first four months of FY2023, led by higher revenue and capital expenditure and an up-fronting of tax devolution to the state governments. While net tax revenues contracted by 13%, non-tax revenues doubled on the back of the RBI dividend, amidst a 16% rise in revenue expenditure, and a robust 52% YoY expansion in capex.”

Nayar further added that despite the year-on-year spike in the Government of India’s fiscal deficit and the anticipation of high inflation in August 2023, they expect the 10-year G-sec (Government Securities) to range between 7.15% and 7.25% in the near term, influenced by global trends.

Gross tax collections in April-July FY2024 witnessed a mild 3% year-on-year growth, primarily due to a decline in direct taxes. However, this was offset by healthy growth in GST collections and customs duty. In July 2023, excise duty saw a modest 2% growth after several months of sustained contraction following the reduction in cess on petrol and diesel in May 2022.

Fiscal Deficit Explained

Fiscal deficit is a crucial economic metric that reflects the shortfall between the government’s total revenue and its total expenditure. When a government’s expenses exceed its revenue, it needs to borrow to bridge this gap. The fiscal deficit is expressed as a percentage of the annual budget target. A higher fiscal deficit can indicate increased government borrowing, which can have implications for the overall economy.

Factors Contributing to the Widening Fiscal Deficit

The widening of India’s fiscal deficit in April-July 2023 can be attributed to several key factors:

  1. Higher Revenue and Capital Expenditure: The government increased its spending on both revenue and capital items, contributing to higher expenditure.
  2. Up-fronting of Tax Devolution: The early distribution of tax revenue to state governments played a role in expanding the deficit.
  3. Net Tax Revenue Contraction: Despite some growth in gross tax collections, net tax revenues contracted by 13%, affecting the government’s overall revenue.
  4. Non-Tax Revenue Growth: Non-tax revenues saw a significant increase, driven by the RBI (Reserve Bank of India) dividend.
  5. Rise in Revenue Expenditure: A 16% year-on-year increase in revenue expenditure added to the deficit.
  6. Robust Capital Expenditure: Capital expenditure saw a substantial 52% year-on-year expansion, further contributing to the deficit.

Outlook for the 10-Year G-Sec Yield

Despite the fiscal deficit’s expansion and expectations of high inflation in August 2023, Aditi Nayar from ICRA predicts that the 10-year Government Securities (G-Sec) yield will remain in the range of 7.15% to 7.25% in the near term. This forecast is influenced by global economic trends and monetary policies.

Gross Tax Collections Analysis

The analysis of gross tax collections in April-July FY2024 indicates the following trends:

  • Mild 3% YoY Growth: Gross tax collections witnessed a mild year-on-year growth rate of 3%, reflecting the overall economic environment.
  • Direct Taxes Decline: The growth in gross tax collections was dampened by a decline in direct taxes, which offset other gains.
  • Healthy GST Collections: GST collections showed healthy growth during this period, contributing positively to overall tax revenue.
  • Customs Duty Growth: Customs duty collections also contributed to the positive trajectory in tax revenue.

Excise Duty Performance in July 2023

In July 2023, excise duty, which had been contracting for several months due to the reduction in cess on petrol and diesel in May 2022, saw a modest 2% growth. This indicates a potential recovery in this revenue source, albeit gradual.

As India navigates its fiscal challenges, the government’s fiscal deficit and revenue collection strategies will remain critical factors to monitor, impacting the country’s economic stability and growth prospects.

Business Standard

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