RBI’s huge dividend helps limit Centre’s April-May fiscal deficit to Rs 2.1 lakh crore

The Centre is targeting a fiscal deficit of Rs 17.87 lakh crore for the current financial year.

The Indian government's fiscal deficit increased to Rs 2.10 lakh crore in April-May from Rs 1.34 lakh crore in April, according to data released by the Controller General of Accounts on June 30.

At Rs 2.10 lakh crore, the fiscal deficit for the first two months of the current financial year accounts for 11.8 percent of the full-year target of Rs 17.87 lakh crore.

The fiscal deficit in the first two months of 2022-23 was 12.3 percent of the target.

However, in May, the fiscal deficit was just Rs 76,692 crore – the second-lowest in 13 months and down from Rs 1.29 lakh crore in My 2022 – thanks to non-tax revenue more than tripling to Rs 1.24 crore. The government’s tax revenue jumped sharply last month because of the far larger than expected dividend transferred by the Reserve Bank of India (RBI).

On May 19, the RBI's central board of directors approved the transfer of Rs 87,416 crore to the Centre as dividend for 2022-23. This was sharply higher than the government's Budget estimate of Rs 48,000 crore, which also included dividends from state-owned lenders.

The RBI's massive dividend meant the government's total receipts were up 34.8 percent in May at Rs 2.45 lakh crore and 8.9 percent higher in April-May at Rs 4.16 lakh crore.

On the other hand, net tax revenue to the Centre contracted by 3.2 percent in May, coming in at Rs 1.19 lakh crore. April and May taken together, the year-on-year fall in net tax collections was down 9.6 percent at Rs 2.78 lakh crore.

Tax revenues have been weak so far in 2023-24 largely due to corporate tax collections, which were down 17.6 percent in May and a huge 28 percent in April-May. However, the finance ministry said on June 18 that it had collected Rs 3.8 lakh crore - after adjusting for refunds - as direct taxes in the first two-and-a-half months of 2023-24. This was 11.2 percent higher compared to the same period last financial year.

The Centre's net tax collections will likely contract on a year-on-year basis again in June - data for which will be released on July 31 - after the Union government released Rs 1.18 lakh crore to states as tax devolution on June 12 - double the normal amount of Rs 59,140 crore.

The Centre releases tax devolution to states in 14 equal instalments every year. As such, this involves two months where the instalment is double the usual monthly amount. While these double-instalment months have normally come at the end of the financial year once the Centre has greater clarity about its finances, the last couple of years have seen these additional instalments being brought forward every year on account of the strong footing the finance ministry has found itself in. The early transfer of these resources also helps states speed up their capital spending and finance their development and welfare expenditure.

Meanwhile, the Centre's total expenditure in May was up 3.5 percent at Rs 3.22 lakh crore, with capital expenditure jumping more than three times to Rs 89,332 crore. In April-May, the government spent Rs 6.26 lakh crore in total – 6.9 percent more than in the first two months of 2022-23 – while capex surged to Rs 1.68 lakh crore, just under 17 percent of the record full-year target of Rs 10 lakh crore.

According to Aditi Nayar, ICRA's chief economist, fiscal concerns "appear limited" at the moment.

The Indian government has set itself a target of reducing the fiscal deficit to 5.9 percent of GDP in 2023-24 on its way to meeting the medium-term milestone of 4.5 percent by 2025-26.