Centre's fiscal deficit at 5.2% of GDP in Q1; experts say it may widen

Expect capex to pick up in the second half of the year and inch closer to 6.4% Budget estimate for full year

The Centre’s fiscal deficit constituted 5.2 per cent of gross domestic product (GDP) in the first quarter of financial year 2022-23 (FY23) against the Budget Estimates (BE) of 6.4 per cent for the entire year.

Besides, there was also a fiscal surplus of almost Rs 11,000 crore in July. This implies that the Centre’s fiscal deficit was less than 5.2 per cent of GDP in the first four months of the current fiscal.

However, experts feel this does not necessarily imply that the Centre is on course to ensure the fiscal deficit is lower than the BE of 6.4 per cent in the current fiscal, despite a rise in expenditure on food and fertiliser subsidies and lower non-tax receipts. The experts believe that capital expenditure (capex) will be higher in the second half.

ICRA chief economist Aditi Nayar said capex is likely to pick up in the second half of the year, which will add to the fiscal deficit in a back ended manner.

The Centre has incurred 27.8 per cent of its budgeted capex in the first four months of the current fiscal. “As of now, we expect the fiscal deficit to remain at 6.4 per cent of GDP, assuming a nominal GDP growth of 15 per cent,” she said. 

It should be noted that the Budget assumed nominal GDP growth of 11.1 per cent to Rs 258 trillion for FY23.

Bank of Baroda chief economist Madan Sabnavis said, “In my view, what we are seeing today on the fiscal deficit front is a result of high growth in revenue and lower growth in expenditure. The important thing is whether or not the former will be maintained. If it is, there will be comfort for the government for sure.”

He said that expenditure is already higher than the budgeted numbers on the foodgrain provision scheme, and fertiliser subsidies, which would, under normal conditions, have increased the fiscal deficit.

“This may be eschewed if this trend (higher growth in revenues) continues. Also there may be slippages in disinvestment as after [the Life Insurance Corporation of India’s listing] no big announcement has been made. Hence, in my opinion the possible slippage will be avoided if this trend persists,” Sabnavis said.

One other reason for the lower fiscal deficit than BE in the first four months is largely to do with conservative estimates of tax revenues in the Budget for FY23. The Budget estimated the Centre’s tax receipts (after devolution to the states) to rise by 9.6 per cent at Rs 19.34 trillion during FY23, compared with Rs 17.6 trillion projected for the previous year in Revised Estimates. However, the growth reduces to just 6.3 per cent over actual tax collections of Rs 18.2 trillion in FY22.

Tax revenues at Rs 6.7 trillion in the first four months constituted 34.4 per cent of the BE for the entire year.

The food subsidy at a bit over Rs 64,000 crore in the first four months of FY23 accounted for 31 per cent of BE. Similarly, nutrient-based subsidy at Rs 11,600 crore constituted 28 per cent of BE. However, urea subsidy at around Rs 34,000 crore accounted for 53 per cent of BE.

This trend of the fiscal deficit widening in the later part of a year is a relatively new phenomenon.

A note by Motilal Oswal Financial Services (MOFSL) said earlier, there used to be a continuous pattern in Union government finances – the fiscal deficit in the first quarter of the year would be so high that there was a continuous debate on whether the government will be able to meet its deficit target for the year or not.

The Centre’s fiscal deficit averaged 40 per cent of the BE in the first quarter in the 2000s decade, while it averaged over 50 per cent of BE in the 2010s decade (up to FY20), MOFSL said.

Due to Covid-19, the fiscal deficit stood exceptionally high at 83.2 per cent of BE in the first quarter of FY21. However, the fiscal deficit was just 18.2 per cent of BE in Q1FY22. It remained very low at 21.2 per cent of BE in Q1FY23.

Barring Q1FY11, a fiscal deficit of 20 per cent of BE in Q1 is unusually low, and less than half of its long-run average of 45 per cent in the past quarter of a century.

This raises the question: Is there a shift in the Union government’s fiscal deficit strategy to back-loaded now from being front-loaded in the pre-Covid era?

“The sudden reduction in fiscal deficit in Q1 seems more a result of receipt conservatism, rather than any change in its spending strategy. It is very likely that the BEs will move towards optimism sooner than later. If so, this trend in the fiscal deficit will prove to be temporary,” MOFSL said.