Indirect tax collections have underperformed due to lower excise duty collection

Capital expenditure achieved 49% of its target in H1FY24

Mumbai, 1 November, 2023: H1FY24 fiscal deficit stood at Rs7 tn or 39.3% of the Budget Estimate (BE). Capital expenditure achieved 49% of its target in H1FY24 and revenue expenditure achieved 46.5% of the target - both were higher relative to the same period last year. 

•  Direct tax collections, which were a laggard in Q1FY24, have caught up in Q2 FY24 led by income and corporate tax collections. Indirect tax collections, on the other hand, have underperformed due to lower excise duty collection. 
•  Although receipts have caught up with the expenditure profile in Q2 FY24, downside risks remain in H2 FY24 on account of expected lower nominal GDP growth (vs. BE). Although the government is likely to achieve fiscal deficit to GDP target of 5.9%, but not without reorientation of the expenditure profile. 

q Capital expenditure continues to score higher Centre’s capital expenditure was at Rs4.9 tn in H1 FY24 as against Rs3.4 tn in H1 FY23, resulting in growth of 43% YoY fiscal year-to-date (FYTD). The monthly run rate of Rs818 bn so far exceeds the run rate of last four years. While capital expenditure continues to lead in terms of growth, revenue spending also reported a double-digit growth of 10%, highest in the past five years. Quality of spending as seen through the capital-to-revenue expenditure ratio continued to improve (H1 FY24: 0.30 vs. H1 FY23: 0.23). 

Snapshot of sectoral spends

Looking at the sector-wise expenditure pattern in annual terms, agriculture, fisheries and animal husbandry, electronics and IT, civil aviation and heavy industries showed a significant progress in total spending. From the capex perspective, defence and department of agriculture registered a sharp growth. On the revenue account, sharp growth in expenditure was seen in the ministry of heavy industries, ministry of agriculture and ministry of fisheries and animal husbandry. 

q Revenue receipts improving Total receipts of Rs14.1 tn in H1 FY24 saw growth of 18% over the corresponding period of last year, backed by improvement in net tax revenues collection in Q2 FY24. On the direct tax front, income tax grew by 31% YoY FTYD, while corporate tax grew by 20% YoY FYTD. On the indirect tax front, customs revenue grew by 23% YoY FYTD. However, excise duties declined by 11% YoY FYTD (Exhibit 1). q Fiscal on track, but upside risks remain With the corporate and income tax collections pacing up in Q2 FY24, the centre appears closer to its target of achieving its budget deficit target of 5.9% of GDP. Nonetheless, risks to this view continue to remain from lower nominal GDP growth. We expect nominal GDP growth to print in the range of 8-9% vs. the budget expectations of 10.5%. This is on account of low FY24 wholesale inflation and a possible 20bps slippage to the RBI’s FY24 GDP estimate of 6.5%. With nominal GDP expected to be lower, revenue receipts on account of both direct and indirect tax collections might see a miss. To add, disinvestments receipts are likely to disappoint for yet another year. If the pace of expenditure remains steady, then possibility of fiscal slippage remains on the cards. This increases the likelihood of expenditure reorientation. In our view, capital expenditure might see some moderation ahead of elections. q Outlook on bond yields Upward pressure on bond yields is likely to sustain through H2 FY24. The reason for this stems from the assumption of higher global bond yields and higher oil prices sustaining through the remaining months of the year. Tightness in banking sector liquidity is also likely to keep the pressure on bond yields intact. As of 30 October, systemic liquidity is at a deficit of Rs1.4 tn. This is likely to turn positive in November 2023 on expectations of increased government spending, with government cash balances close to Rs4 tn. However, OMO sales could once again tighten the liquidity keeping the bond yields elevated. We view 10Y g-sec yields in the range of 7.25-7.40% through H2 FY24 despite good demand from banks and insurance firms.

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