Fiscal deficit narrows to 5-year low in Apr-Aug; lowest in 18 years

The government's fiscal deficit as a percentage of the budget target narrowed to the lowest in 18 years in the April-August period in 2021-22 backed by a sharp surge in revenue mop-up and a marginal increase in spending.

This has brightened prospects of fiscal deficit clocking in lower than the budget estimates for the current fiscal by up to 0.5 per cent of GDP. Economists estimate that the fiscal deficit for the current fiscal will range between 6.3 and 6.6 per cent of the gross domestic product, as against the target of 6.8 per cent of GDP.

The gap between Union government's revenue and expenditure nearly halved to Rs 4.68 lakh crore between April and August compared to Rs 8.7 lakh crore in the corresponding period last year and about 15 per cent lower than the pre-Covid year of 2019-20, government data showed.

In fact, in absolute terms, the fiscal deficit was at a five-year-low during this period in FY22. As a percentage of the budget estimate, the fiscal deficit at 31.1 per cent was the lowest in 18 years. In 2003-04, the fiscal deficit in the April-August period was 28 per cent of the BE. Last year in the same period, FD had already exceeded the BE by over 9 per cent.

Fiscal deficit arises when government spending exceeds its revenues. "The Centre's fiscal deficit in FY2022 is likely to be lower than budgeted, the extent of which will be driven by the size of the disinvestment inflows that are eventually realised," said Aditi Nayar, Chief Economist, ICRA.

"The healthy expansion in the gross tax revenues in H1 FY2022 relative to the pre-Covid level augurs that the upturn will sustain in the second half as well, even though a normalising base may dampen the pace of growth going forward. We expect the GoI's gross tax revenues to exceed the FY2022 BE by at least Rs 2 lakh crore," said Nayar.

Revenue receipts in the April-August period at Rs 7.93 lakh crore are 114 per cent higher compared to the last year, providing the government with additional spending power to fuel economic recovery after the disruption caused by the second Covid-19 wave earlier this year. Although the total expenditure during the first five months at Rs 12.7 lakh crore was up by just 2 per cent on a year-on-year basis, the Finance Ministry last week lifted spending caps on ministries, making way for higher expenditure to boost growth.

Economists expect the government's gross tax revenues to exceed budget estimates by around Rs 2 lakh crore.
Capital expenditure, which is used to create assets like infrastructure and acts as a multiplier, was up 28 per cent compared to last year at Rs 1.71 lakh crore. It is 31 per cent of the budget estimate of the fiscal. The Budget for FY22 has provided a capital outlay of Rs 5.54 lakh crore, a sharp increase of 34.5 per cent over the Budget Estimate of FY21.

However, revenue expenditure,  which comprises fixed obligations or ongoing operating expenses, such as salaries and pensions, was down 1 per cent compared to last year to Rs 11 lakh crore. Revenue expenditure helps create demand in the economy. The muted growth in revenue expenditure was seen as a concern for economic growth outlook for the current fiscal. Revenue expenditure in August grew 34 per cent year-on-year, compared to a 23 per cent contraction in the previous month.

"..Government's recent decision of lifting the expenditure cap may help in revenue expenditure picking up in coming months. Yet India Ratings and Research (Ind-Ra) believes the upside to economic growth due to higher expenditure will be limited," said Sunil Kumar Sinha, Principal Economist, India Ratings & Research. "…the fiscal deficit in FY22 will be lower than budgeted 6.8 per cent of GDP and (India Ratings) expects it to be 6.6 per cent of GDP," he added.

Nayar of ICRA said with the modest net fiscal cost of the first supplementary demand for grants, and the expected enhancement in the outlay for fertiliser subsidies for the rabi season as well as for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), "We expect the GoI's total expenditure to exceed the FY2022 BE by around Rs 500-600 billion."

The net tax revenue in the April to August period was 127 per cent higher compared to the previous year and nearly 60 per cent higher compared to 2019-20, on the back of sharp pick-up in corporation tax, customs, excise duty and goods and services tax.

Corporation tax at Rs 1.68 lakh crore is 160 per cent higher than last year and 51 per cent higher than the pre-Covid year 2019-20. Income tax mop up at Rs 1.99 lakh crore is 69 per cent higher than last year and 15 per cent higher than FY20. Customs collections at Rs 76,225 crore are 136 per cent higher than the last year's same period, powered by gold imports. For instance, gold imports in July surged to $4.2 billion from $1.78 billion a year ago.

Excise duty collection at Rs 1.37 lakh crore is 37 per cent higher than last year. The non tax revenue for April-August came in at Rs 1.49 lakh crore, which is 73 per cent higher than the last year. This is largely on account of the Rs 99,122 crore surplus the Reserve Bank of India transferred to the government in May.

Also read: Fiscal deficit in April-Aug stands at Rs 4.7 lakh cr: Govt

Also read: April-July fiscal deficit at 21.3% of Rs 15.07 lakh cr FY22 target