India’s Q2 fiscal deficit at 8.1% of FY25 target

New Delhi: India’s fiscal deficit for the first quarter stood at 8.1% of the estimate for FY25 due to higher tax receipts, a handsome dividend payout by the central bank and lower government capital expenditure due to the general elections.

The fiscal deficit—the gap between expenditure and revenue—was ₹1.36 trillion during the quarter. The deficit for the corresponding period of the previous year stood at  ₹4.51 trillion, or 25.3% of the annual estimate (of ₹17.87 trillion) for FY24.

The annual estimate for the FY25 full year stood at  ₹16.85 trillion, according to the interim budget numbers. However, the government brought down the fiscal deficit projected for this financial year to  ₹16.13 trillion in the annual budget presented last week.

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According to the target set out in the annual budget, the fiscal deficit during Q1 FY25 stood at 8.43% of the estimates for the financial year.

During Q1, FY25 period, the net tax receipts stood at ₹5.5 trillion, or 21% of the annual target set in the interim budget, against   ₹4.34 trillion in the same period last year, according to the CGA data.

Total government expenditure during the period was ₹9.7 trillion, or 20.4% of the yearly target, against ₹10.51 trillion in the same period of the previous year.

Capital expenditure stood at ₹1.81 trillion during Q1, FY25 period, or 16.3% of the annual estimate, from  ₹2.78 trillion or 27.8% of the annual estimates for FY24.

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Additionally, government spending was subdued due to general elections.

During the Q1, FY25 period, while non-tax revenue stood at ₹2.8 trillion or 70.1% of the interim budget estimates, total revenue receipts stood at ₹8.3 trillion, or 27.6% of the estimates for FY25.

Lower fiscal deficit target followed RBI's unprecedented dividend payout

To be sure, the lower fiscal deficit target set by the Centre in the annual budget follows the Reserve Bank of India's (RBI) unprecedented dividend payout of  ₹2.11 trillion for the central government for FY24–141% higher than in FY23.

RBI's dividend payout will also be instrumental in compensating for any slippages in tax revenue or increased public spending in FY25, and ensuring the fiscal deficit reduction is in sync with the committed glide path of achieving a 4.5% fiscal deficit target by FY26.

"The Government of India's (GoI's) fiscal deficit shrunk to ₹1.4 trillion or 8.1% of the FY2025 BE in April-June FY2025, from ₹4.5 trillion in Q1 FY2024, led by a sharp compression in capital expenditure during the Election months, as well as the substantial dividend received from the RBI," said Aditi Nayar, chief economist, head of research and outreach at rating agency ICRA.

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"The GoI's capex was tepid at ₹374 billion in June 2024, compared to ₹1.1 trillion in June 2023. To meet the FY2025 BE (budget estimate), ₹9.3 trillion of capex needs to be incurred in the last three quarters of the year, a growth of 39% relative to the same period of FY2024 ( ₹6.7 trillion), which appears quite challenging," Nayar added.

The Centre has trimmed its fiscal deficit target for FY25 to 4.9% of gross domestic product, significantly lower than the 5.1% target announced during the interim budget in February.

During her budget speech on Tuesday, finance minister Nirmala Sitharaman said the fiscal deficit target for 2024-25 will be about 200 basis points below the earlier estimate for the ongoing fiscal year. 

The government aims to reduce the fiscal deficit to 4.5% or less by FY26, maintaining its proposed fiscal glide path by the financial year 2025-26.