InvestorQ : Is it true that much of the increased fiscal deficit in the latest month is due to the spike in capital spending by government? Can you elaborate on that a bit?
Anu Biswas made post

Is it true that much of the increased fiscal deficit in the latest month is due to the spike in capital spending by government? Can you elaborate on that a bit?

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Ria Jain answered.
4 weeks ago
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In a sense, the news on fiscal deficit for the month of September 2022 has been rather mixed. On the one hand, there is a spike in the fiscal deficit. ON the other hand, the spike in fiscal deficit has been driven by capex or capital expenditure. On a MOM basis, there was a 50% spike in the capex spending as the government decided to prioritize the capex spending to ensure that the growth levers were not lost amidst the rising interest rate scenario. That largely explains the Centre’s fiscal deficit rising to 37.3% of full year budget estimates (BE) as of the end of the first half of the fiscal year FY23.

It may be recollected that in the last budget presented in February 2022, the fiscal deficit had been pegged at 6.4% of GDP. Now it looks perfectly achievable for the current fiscal year and there is also the possibility that it may be bettered slightly. This is part of the fiscal boost to the economy through the government sponsored capex programs to revive growth in the economy. It would provide a counterweight to inflation playing havoc with the purchasing power of people. One positive impact of this surge in capex is the strong growth in cement and steel output in the month of September 2022.

In the first 6 months of FY23, fiscal deficit stood at Rs6.20 trillion which is higher compared to Rs5.30 trillion recorded in first six months of FY22. However, thanks to better collections of taxes and cuts in revenue spending, the eventual fiscal deficit may be either at 6.4% or even slightly lower than that. Even in the previous year, the fiscal deficit had been reined at 9 bps below the estimates. What is interesting is that the government has managed to also direct more money to capex; which at Rs3.43 trillion is already at 45.7% of annual target. This year, the capex target is sharply higher and the spending has been stronger too.

The good news is that the government has not relented on subsidies. It will also absorb the additional subsidies to the tune of Rs2.6 trillion during the year on food and fertilizers. With revenue spending growing at just about 6% in H1FY23, it is likely that the revenue spending could spike in the second half. However, even if the government eventually tones down the fiscal deficit and maintains at 6.4%, it would be good in a tough year. In first half, the average monthly capex was at Rs57,000 crore, which is still lower than the required monthly average of Rs62,500 crore. However, it is very close to the target and that is the good news.

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