Govt's fiscal deficit at 31.1% of Budget Estimate till Aug, an 18-year low

This was despite a YoY spike in expenditure that month, after falling in the previous month

The Centre's fiscal deficit as a proportion of the Budget Estimates fell to an 18-year low of 31.1 per cent in the first five months of the current financial year.

This was despite a year-on-year spike in expenditure in August, after falling in the previous month.

In absolute terms as well, the gap between the Centre's expenditure and receipts narrowed to Rs 4.7 trillion during April-August, 2021 from Rs 8.7 trillion in the corresponding period of the previous year. It was, in fact, lower than Rs 5.5 trillion in the corresponding pre-Covid period of 2019-20.

The decline in the deficit could be attributed to a 114 per cent rise in revenue receipts amid a cautious two per cent increase in total expenditure till August of the current financial year.

However, the pace of expansion of revenue receipts moderated to 114 per cent at the end of August from 194 per cent a month-ago as the base normalised with the progressive economic recovery last year as well as the inflows of the RBI's surplus during August 2020, Aditi Nayar, chief economist at Icra, said.

"Encouragingly, both revenue and capital spending saw a healthy increase in August 2021, more than offsetting the contraction seen in July 2021," she said.

Nevertheless, the Centre's revenue expenditure recorded a mild two per cent growth in July-August 2021, which suggests that government final consumption expenditure may weigh upon the GDP growth in Q2 FY2022, while the robust 31 per cent expansion in capital expenditure in this two month period will support the growth in gross fixed capital formation.

Taxes yielded the government almost 60 per cent more revenues at Rs six trillion than even corresponding pre-Covid level of 2019-20.

"The healthy expansion in the union government's gross tax revenues in the first half 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 FY'22 BE by at least Rs two trillion," Nayar said.

Besides, the transfer of surplus by the RBI to the Centre was around Rs 500 billion higher than budgeted.

Moreover, there could be modest inflows from the National Monetisation Pipeline (NMP). However, following the package announced by the government for the telecom sector, Nayar assessed the inflows from this sector into the  non-tax revenues to be limited to Rs. 280 billion, trailing the budgeted Rs. 540 billion for FY'22.

The government had, meanwhile lifted the cap from the expenditure. As such, expenditure for September which would be made available next month end is likely to show a high pace of growth. The expected rise in fertiliser subsidies and MNREGA allocations, the Centre's total expenditure can exceed the BE of Rs 27.9 trillion for the current financial year.

Even then, the Centre's fiscal deficit is likely to be lower than budgeted, depending on the disinvestment receipts. Disinvestment has yielded just Rs 12,000 crore against the target of Rs 1.05 trillion. In this respect, LIC IPO could fill much of the gap. Another Rs 15,000-20,000 crore could come from Air India disinvestment, which is the process.