Home / Economy / Centre’s fiscal deficit widens in Aug as revenue moderates

The Centre’s fiscal deficit widened in the April-August period to touch 33% of the budget target for the financial year — the result of a sharp offtake in capital expenditure, moderate increase in revenue and higher transfers to states.

The development comes when the government expects its subsidy payouts to rise due to an extension of the free foodgrain scheme, depreciating rupee and decline in excise and customs duty collections.

The gap between the government’s revenue and expenditure, at 5.41 trillion during the April-August period, is 15.6% higher than the corresponding period of last year, according to data from the Controller General of Accounts released on Friday.

Fiscal deficit
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Fiscal deficit

Fiscal deficit in the first five months of FY23 was at 32.6% of the budget target of 16.6 trillion set for the financial year, as against 31.3% a year ago.

Fiscal deficit in August at 1.47 trillion, was 36.7% higher than the corresponding month last year. Economists said risks to the government’s fiscal deficit target of 6.4% of gross domestic product (GDP) for FY23 were due to revenue loss on account of the excise duty cut, and the need for additional spending on food, fertilizer and cooking gas subsidies. That said the windfall tax on crude oil and other export duties, along with the buoyancy in the goods and services tax and higher-than-expected nominal GDP, may help the Centre contain the deficit.

The government contained the fiscal deficit for 2021-22 to 6.7% of GDP, better than the 6.9% budget estimates, largely on the back of higher-than-expected revenue collections and nominal GDP growth, which is the denominator.

Fiscal deficit goes up when the government’s spending exceeds its revenue collections.

“There are several upside risks to the fiscal deficit target for FY23...However, a large part of it will be absorbed by higher-than-estimated non-excise taxes, savings on account of lower wheat procurement, as well as the windfall tax on domestic crude oil production and export," said Aditi Nayar, chief economist, ICRA Ltd.

“It would limit the extent of the overshoot in the Union government’s fiscal deficit in FY23 relative to the budget estimates of around 1 trillion."

Revenue receipts in April-August, at 8.68 trillion, were merely 2.9% higher compared to last year, on the back of a contraction in non-tax revenue and a slowdown in tax revenues. Revenue receipts have touched 37.1% of the full year’s target up to August compared to 44.4% in the year-ago period. Tax revenue in August contracted 70% compared to the same month last year.

“Incremental net revenue receipts in August 2022 halved from the August 2021 level, primarily on account of the double instalment of tax devolved to state governments in that month given the buoyancy in revenues... Additionally, various taxes such as corporation tax, personal income tax, excise duty, customs duty and CGST saw a year-on-year decline in collections in August 2022," said Nayar.

Total expenditure during the period, at 13.9 trillion, was 9.4% higher compared to last year. Capital expenditure, which is used to create assets like infrastructure, and acts as a multiplier, was up 46.8% year-on-year to 2.5 trillion. It is 33.7% of the full year’s estimate as against 31% in the year-ago.

However, revenue expenditure, which comprises ongoing operating expenses such as salaries and pensions, was up 2.7% to 11.37 trillion compared to 11.1 trillion in the year earlier. The Centre is also trying to cut avoidable spending amid concerns of a private investment slowdown due to monetary policy tightening.

The government on Wednesday announced the extension of the free foodgrain scheme by another three months, costing the exchequer an additional 44,762 crore. It will take the total food subsidy bill this year to 3.2 trillion as against 2.06 trillion estimated in the budget.

The Union Cabinet also approved the release of additional 4% dearness allowance for central government employees and dearness relief for pensioners with effect from 1 July. This is expected to cost the government an additional 8468 crore in the remaining eight months of the current fiscal.

The government has decided to lower borrowing for the current fiscal by 10,000 crore than earlier projected for 2022-23 in the budget, suggesting that it was confident of meeting the fiscal deficit target set for the year.

Customs collection and excise duty mop up posted a decline during the first five months of the fiscal on account of measures including tax reduction in petrol and diesel and customs duty suspension for cotton to tackle inflation.

“The second half will be critical from two angles. First, tax collections will be tested under GST based on sustenance of consumption spending. Second, the government would have to expedite its capex programme. These two will hold the clue to the fiscal numbers," said Madan Sabnavis, chief economist, Bank of Baroda.

ABOUT THE AUTHOR

Dilasha Seth

" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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