Tepid Capex In H1 Limits Risk Of Fiscal Deficit Overshoot In FY25
The centre's fiscal deficit narrowed to Rs 4.7 trillion in H1 FY2025, amid a healthy uptick in revenue receipts, a modest rise in revex and a contraction in capex
Talking about central government's finances, the rating agency Icra in a report said that tepid capex in H1FY2025 limited the risk of fiscal deficit overshoot in FY2025. It stated that the centre's fiscal deficit narrowed to Rs 4.7 trillion in H1 FY2025, amid a healthy uptick in revenue receipts, a modest rise in revex and a contraction in capex.
“With a 9 per cent year-on-year (YoY) growth in net tax revenues, 51 per cent uptick in non-tax revenues, and a modest 4 per cent rise in revex, amidst a 15 per cent contraction in capex, the government of India’s (GoI’s) fiscal deficit narrowed substantially to Rs 4.7 trillion in H1 FY2025 from Rs. 7.0 trillion in H1 FY2024,” the report added.
After contracting sharply in Q1, the government's capex rose by 10.3 per cent year-on-year (YoY) in Q2 FY2025, which is likely to support economic growth in that quarter. Fiscal deficit is expected to print in line with or trail the FY2025 BE of Rs 16.1 trillion or 4.9 per cent of gross domestic product (GDP), Icra added.
Notably, gross tax revenues (GTR) rose by 12.0 per cent YoY in H1 FY2025, with the uptick in direct taxes (+13.6 per cent) outpacing that in indirect taxes (+8.5 per cent). In H2 FY2025, GTR needs to grow by 9.8 per cent YoY to meet the FY2025 BE of Rs 38.4 trillion, which seems plausible at the current juncture. Among non-tax items, the disinvestment target of Rs. 500 billion for FY2025 may be missed by Rs. 200 billion.
After the lacklustre Q1 (YoY: -35 per cent) amid the general elections, the Modi government's capex expanded sharply in July (+108 per cent), but the momentum did not sustain in the subsequent two months (-11 per cent). Overall, capex rose by 10.3% YoY in Q2 FY2025, which should support economic growth in that quarter.
To meet the FY2025 BE (Rs 11.1 trillion), the rating agency stated that the government needs to incur a capex of Rs. 1.16 trillion per month during H2 FY2025, which entails a considerable YoY expansion of 52 per cent. This appears rather challenging at this juncture and Icra expects the capex target of Rs 11.1 trillion for FY2025 to be missed by a margin of at least Rs 0.5 trillion.
Overall, “We believe that the miss in the capex target is expected to provide some cushion to absorb the shortfall on account of disinvestments,” it stated. Accordingly, Icra expects the fiscal deficit to print in line with or trail the FY2025 BE of Rs 16.1 trillion or 4.9 per cent of GDP, at the current juncture.
The demand-supply dynamics for G-secs remain favourable, amid limited risks related to fiscal slippage, the marginal increase in the supply of G-secs in H2 FY2025 vs. H2 FY2024, and continued FPI inflows into G-Secs owing to the bond index inclusion. Icra expects the ten-year yield to trade between 6.65 to 6.90 per cent in the near term.
