Share of external financing of fiscal deficit soars to 4.5% in Q1: Report

The share of external financing has jumped to 4.5 per cent in Q1 FY21 from 1.6 per cent in the same quarter last fiscal, which in terms of the quantum has skyrocketed by 325 per cent Y-o-Y, says a report analysing the fiscal numbers of the government.

The government has run 83 per cent of its borrowing target as of June, according to official numbers released on July 31, due to the impact of the pandemic that crippled the economy.

The massive spike in the share of external source of funding the fiscal deficit comes even as it has been continuing financing primarily through domestic sources -- as much as 96 per cent, according to an analysis by CARE Ratings.

"The share of external financing in the current financial year has jumped from 1.6 per cent as of Q1 of FY20 to 4.5 per cent in Q1 of the current fiscal. In terms of the quantum of external financing, this is a massive 325 per cent higher year-on-year during the first quarter," says the report without quantifying the actual numbers.

When it comes to domestic financing of the fiscal deficit too, there has been a near 50 per cent increase in Q1 year-on-year. Domestic financing is mainly met through market borrowing, which has touched as much as 83 per cent so far, which is a full 117 per cent increase over the same period last fiscal, says the report.

The higher dependence on debt is due to the lockdown which created an unprecedented financial stress for the government due to the sharp decline in income and an increase in expenditure.

However, in an encouraging sign, despite the massive revenue shortfalls there has been an increase in capex.

The fiscal deficit in Q1 stood at Rs 6.62 trillion, which is 53 per cent more than a year ago; and as a percentage of the budget estimates it is 83 per cent as of June 2020 as against 61 per cent a year ago.

Government's total expenditure has risen 13 per cent in Q1 led by an increase in capex; and of this revenue expenditure accounted for 89 per cent, which is up 11 per cent Y-o-Y.

The total capex has jumped a full 40 per cent in Q1, in spite of its income falling 47 per cent.

It can be noted that the government has so far failed to execute any of its disinvestment plans which were budgeted at Rs 2.1 trillion for the fiscal, the report said.

The tax revenue dipped 32.6 per cent, income tax collection fell 35.9 per cent and corporate tax dipped 23.3 per cent. Customs duties fell 61 per cent, excise duties inched down 4.3 per cent and CGST fell 52.9 per cent as GST compensation cess collection fell 41.2 per cent during the reporting quarter.

Non-tax revenue fell 54.6 per cent, while interest receipts declined 50 per cent, pulling down total revenue receipts by 47.3 per cent to Rs 1,50,008 crore, it said.

According to Madan Sabnavis, the chief economist, and Kavita Chacko, senior economist at the agency, lower tax collections have dragged down the revenues of the government as there has been a steep 33 per cent drop in the government's tax revenue in Q1, which can be directly linked to be the consequence of the lockdown and the resultant lower levels of economic activity.

"The 36 per cent decline in income tax revenue throws light on the fallout of the lockdown on people's incomes. Corporation tax collections has contracted by 23 per cent, emphasising the bleak business prospects," according to the report.

What is more worrying is that despite the steep hike in excise duty on fuel, the revenue on this account has also contracted due to lower consumption, it said.

Total capital expenditure of the Centre increased to Rs 88,273 crore from Rs 63,000 crore.

Of this, food and public distribution accounted for 13 per cent, defence took away 30 per cent, roads got 19 per cent and the railways chipped away with 23 per cent of the total spends, the report said.

These four segments accounted for 85 per cent of the total capex during the period, while revenue expenditure on education, food and public distribution, police and petroleum contracted, as per the report.

Meanwhile transfers to the states and the UTs saw a significant increase of 64 per cent, it said.

The financial position of the government will continue to be strained for the remaining quarters and pick-up if any will only be gradual and will be directly linked to the easing of restriction on economic activity and improvement in demand, the report said. Even with the easing of lockdown, "demand will be muted and as a result, we expect fiscal deficit to scale past 8 per cent of GDP", it added.