Context

• The first half of the fiscal year has shown an encouraging fiscal position for the Union government.
• As the government is expected to meet its fiscal deficit target for the year, it is important to understand the key aspects of the government's financial performance, focusing on revenue and expenditure, fiscal deficit, and the challenges it faces in meeting its targets.

Fiscal Deficit

• Fiscal deficit is a key indicator of the financial health of a government and is a crucial aspect of public finance.
• It represents the difference between the government's total expenditures and its total revenues, excluding money from borrowings.
• In other words, fiscal deficit measures the extent to which a government needs to borrow money to meet its expenses.
• The fiscal deficit is expressed as a percentage of a country's Gross Domestic Product (GDP). A higher fiscal deficit relative to GDP indicates a greater need for borrowing.
• Governments often resort to borrowing to fund public projects, social welfare programs, and other expenditures when their revenues fall short.

The Revenue Performance of the Union Government

• Growth in Revenue Receipts and Expenditure
  • Government’s revenue receipts grew twice as fast as its revenue expenditure.
  • The provisional data released by the Controller General of Accounts indicates that the government’s revenue receipts grew by almost 20 per cent in the first half.
• Fiscal Deficit and Capital Spending
  • While the fiscal deficit has widened, this has been on account of the impressive growth in capital spending amidst a sharp moderation in its disinvestment receipts. 

Factors Driving Revenue Growth

• Surge in Non-Tax Revenues: Revenue receipts did benefit from the 50 per cent surge in non-tax revenues, owing to a higher-than-budgeted dividend surplus transfer by the RBI.
• Net Tax Revenues Expansion: At the same time, net tax revenues, after transfers to states, also recorded an expansion of 15 per cent. This is impressive considering the back-ended structure of the advance tax instalments.

Analysis of Direct Taxes

• Corporation Tax Collections: Corporate tax collections now need to rise by just around 5 per cent in the second half to meet the full year target.
• Income Tax Collections
  • Income Tax Collections can even contract by up to 3 per cent to meet the full-year target.
  • However, if direct taxes do grow by 10 per cent in the second half, collections will exceed the expectations by a sizeable Rs 0.85 trillion.
• GST and Excise Duties
  • ICRA also expects the central GST inflows to mildly overshoot the budgeted target. Though, union excise duty collections will continue to trail the target.
  • Thus, there seems to be an upside in gross tax revenues of around Rs. 0.5 trillion, 42 per cent of which will be devolved to states.
  • This leaves an additional Rs 0.3 trillion with the Centre. However, this will be offset by an almost equivalent shortfall in disinvestment proceeds.

Expenditure Review of the Union Government

• On the expenditure side, as against a 7.5 per cent growth target, the Centre’s total spending grew by a sharp 16.2 per cent in the first half
• Moreover, recent announcements do signal that several allocations need to be enhanced in the supplementary demand for grants.

Key Expenditure Areas of the Government in the First Half

• Food Subsidy: After evaluating the supplementary economic implications associated with extending the provision of free foodgrains under the National Food Security Act (NFSA) for January-March 2024, which is a component of the five-year extension plan, ICRA projects that the expenditure on food subsidies will surpass the allocated budget by Rs 300-400 billion.
• LPG Subsidy: The government has raised the subsidy on LPG by Rs 100/cylinder. This is likely to warrant an additional Rs 95 billion this year.
• Fertiliser Subsidy
  • In October, the Cabinet approved the Nutrient Based Subsidy rates on P&K fertilisers for the ongoing rabi season.
  • Thus, the total fertiliser subsidy requirement to overshoot the budget allocation by Rs 150-200 billion.
• MNREGA Spending
  • The amount spent on NREGA so far already exceeds the budgetary allocation. ICRA estimates that an additional allocation of Rs 250-300 billion may be required.
  • Together this translates to an additional spending of Rs 0.8-1.0 trillion. However, this sum could be matched by expenditure savings, which have ranged between an estimated Rs 1.1-2.3 trillion in recent years.
• Offsetting Expenditure
  • On the capex front, considering current trends, capital spending needs to grow by 30 per cent in the second half to meet the full-year target.
  • But it is expected that the momentum of capex may slow down prior to the general elections which could result in the target for the year being missed and this could help absorb a part of the overshooting of expenditure.

Possible Fiscal Risks

• Impact of Any New Scheme
  • If any new schemes are announced now in the run up to the parliamentary elections, then the actual outgo would only happen once they become fully operational.
  • Thus, the impact on the total expenditure this year is not expected to be material on this account.
• Risk from Enhance in Entitlement in Existing Schemes
  • Once the model code of conduct is announced, new schemes or a significant change in entitlements under existing schemes may not be possible.
  • This suggests that the key risk at this point is from an enhancement in entitlements under existing schemes, the possibility of which appears low.
  • Regardless, with just about four months left in the year, the fiscal impact of any such announcement would be limited.

Future Challenge: Consolidation Goal

• Consolidating the government’s fiscal deficit from 5.9 per cent to 4.5 per cent of the GDP in two years entails either a concerted compression of the revenue deficit or bringing down the capex growth from the levels budgeted for the last two years.
• To avoid the bringing down the capex growth, pre-poll promises that structurally inflate the revenue deficit should be resisted.

Conclusion

• So far, the consolidation has been good and despite polls on horizon, Centre is on course to meeting its fiscal deficit target.
• However, as the fiscal year progresses, the Union government might face a balancing act to meet its targets, navigate potential fiscal risks, and address long-term challenges for sustainable financial management.