Fiscal Deficit Declines In H1, But Calls For Bracing Up To Future Challenges

By crossing 29.4 per cent of the annual target, as against 39.3 per cent a year ago, fiscal deficit has declined for the time being. However, th, going may get tough in the near future. The most gruelling issue is that achievement of capex targets for the fiscal appears a remote possibility in the given scenario. The fiscal deficit declined to Rs. 4.7 trillion in H1, from Rs. seven trillion in the year-ago period, aided by the RBI’s dividend payment in the early part of the fiscal as well as the continuing contraction in the capital expenditure. In H1, the net tax revenues rose by nine per cent, non-tax revenues expanded by 51 per cent boosted by the RBI dividend, and revenue expenditure grew by a modest four per cent, while capex contracted by an unpleasant 15 per cent. After the lacklustre Q1 during the Lok Sabha elections, the government’s capex expanded sharply in July, but the momentum was not sustained in the subsequent two months. In overall, capex rose by 10.3 per cent in Q2, which should support economic growth in that quarter.

To meet the year’s estimated target, the government needs to incur a capex of around Rs. 1.16 trillion per month during H2, which entails a considerable expansion of 52 per cent relative to the year-ago period. This appears rather challenging at this juncture and analysts expect the capex target of Rs. 11.1 trillion for the fiscal year to be missed by a margin of at least Rs. 0.5 trillion. Gross tax collections expanded by 12 per cent on a yearly basis in September, similar to the growth in H1. While corporate tax collections have been tepid, rising by a mere two per cent in H1, income tax collections expanded by a robust 25 per cent during the period, although these trends may have been partly distorted by the timing of refunds.

Credit rating agency Icra believes that income tax collections may surpass the revised estimate of Rs. 11.5 trillion, unless large refunds are released in the latter part of the fiscal, while corporation tax inflows may print in line or slightly lower than the target. On the whole, many analysts believe that the miss in the capex target is expected to provide some cushion to absorb the shortfall on account of disinvestments and taxes. Accordingly, it is expected that the fiscal deficit to print in line or trail the fiscal year’s revised estimate of Rs. 16.1 trillion or 4.9 per cent of the GDP, despite a potential drop in disinvestment revenue. In absolute terms, the fiscal deficit stood at ₹4.75 lakh crore, against ₹7.02 lakh crore a year earlier. This is mainly because of a lower fiscal deficit earlier in the year when the resource mop-up had remained strong and government spending was constrained by the general elections. Experts blamed heavy monsoon downpours in various parts of the country for faltering project executions in recent months.