Walking the fiscal tightrope won’t be easy

Midway through the fiscal year, India's Union government finds itself in a precarious fiscal position. While revenue collections have only risen by 6.1% year-on-year up to September, disinvestment proceeds and customs duty collections are expected to surpass predictions. On the expenditure side, capital spending has slowed and subsidies are projected to exceed estimates, increasing the risk of a fiscal shortfall.

Direct taxes, particularly corporate taxes, have outpaced personal income taxes, but excise revenue has suffered significantly due to duty cuts on petrol and diesel. This has resulted in collections of just Rs 1.07 lakh crore this year, compared to Rs 1.38 lakh crore in the same period last year. However, customs duty collections have increased by 16.5% in the first half of the fiscal year.

The government has also made considerable progress with disinvestment, raising Rs 55,757 crore and an additional Rs 6,366 crore through asset monetisation. Including its share in the IDBI stake sale, the government aims to reach Rs 80,000 crore this year, which seems likely with these developments.

Yet, the slowing capital expenditure and soaring subsidy bill pose challenges. The fertiliser subsidy is expected to exceed the budgeted Rs 1.7 trillion, rising to Rs 2.5-2.7 trillion. This, coupled with the expected shortfall from excise cuts and increased subsidy on petroleum and LPG, may push the fiscal deficit higher than initially projected.

CareEdge Ratings forecasts the fiscal deficit to fall between 4.3-4.5% of GDP, slightly above the Union budget's estimate of 4.3%. Economists at SBI anticipate a further increase of Rs 1.2 lakh crore due to revenue losses and higher subsidies. These fiscal dynamics suggest potential expenditure cuts in the coming months to maintain financial stability.