How has the government fared on managing the fiscal deficit so far?

The central government’s fiscal deficit during the first five months of the current financial year stood at ₹6.43 trillion, or 36% of the annual estimates of ₹17.87 trillion, according to data released by the Controller General of Accounts. This was largely due to a sharp jump in capital expenditure, which was offset by lower tax devolution to state governments, and an increase in non-tax revenues, analysts said. In the year-ago period the fiscal deficit was at ₹5.42 trillion, or 32.6% of the FY23 target of ₹16.61 trillion.

What are the major challenges the government faces in maintaining its fiscal deficit target?

Crude oil prices have risen from $80-82 a barrel in February 2023, during the announcement of the budget, to about $95 a barrel. With India being a net importer of oil, rising crude oil prices will increase expenditure. Meanwhile, the government is also unlikely to meet its divestment target of ₹510 billion during the fiscal. The rising expenditure due to higher oil prices and lower-than-expected revenue from divestment present key challenges for the government to meet its fiscal deficit target of 5.9%.

How is the government addressing these challenges?

Despite rising expenses, a higher-than-budgeted dividend surplus transfer of ₹874.2 billion from the Reserve Bank of India (RBI) and higher dividends from public-sector banks are likely to provide some cushion. The higher dividends are due to higher interest rates. The government also expects tax collections to remain buoyant in the coming quarters.

Is the centre’s tax devolution to state governments expected to increase in the coming months?

While the central government’s gross tax collections expanded by a healthy 17% annually in April-August 2023, with a near-doubling of flows on an annual basis on the back of higher direct taxes, its tax devolution to state governments in August 2023 was in line with the previous month, and lower in annual terms as a double tranche had been released in August 2022. Net tax revenues for August 2023 stood at ₹2.2 trillion, a multifold increase from ₹0.3 trillion in August 2022.

According to rating agency Icra Ltd, the centre needs to release ₹6.4 trillion to the states in the next seven months to meet its FY24 budget estimates. This will contain the incremental fiscal deficit in some of the coming months.

Is the market worried about the government’s ability to meet the fiscal deficit target?

Analysts and economists see limited fiscal concerns at this stage, which is corroborated by the unchanged market borrowing numbers for H2 FY24, relative to the amount indicated in the government’s budget estimates. The centre plans to borrow ₹6.6 trillion by issuing government securities in the second half of 2023-24. However, it could borrow less than this amount from the market as it is likely to dip into small savings, which has shot up in recent months.