India’s fiscal deficit for April-June FY25 quarter shrinks sharply to 8.1%. Here's why

The Centre managed to keep its fiscal deficit significantly in check, recording just Rs. 1.4 lakh crores in Q1 FY25, a mere 8.1% of the budget estimate. This marks a substantial improvement compared to the 25.3% of the target achieved in the same period last year. The robust 41% year-on-year growth in revenue receipts, amounting to Rs. 8.3 lakh crores, has been a key factor in this fiscal achievement, although the report also notes a deceleration in government spending momentum.

Aditi Gupta, an economist at Bank of Baroda, attributes the sharp decline in the fiscal deficit to muted capital expenditure caused by general elections and a surge in receipts driven by a significant increase in income tax collections. Gupta anticipates that capital expenditure will regain momentum now that the elections are over. "With the elections now over, the government’s capital expenditure is expected to pick up. We expect the government to meet its revised fiscal deficit target of 4.9% of GDP in FY25, led by prudent expenditure management and supported by robust tax collections," she noted.

Receipt Growth Buoyant
The central government's revenue receipts for Q1 FY25 stood at Rs. 8.3 lakh crores, a 41% increase from the same period last year. As a percentage of budget estimates, the net revenue receipts reached 27.6% of FY25 BE, higher than the 22.4% recorded in the previous year. The gross tax revenue saw a 23.7% year-on-year rise, largely due to a sharp increase in direct taxes. Specifically, direct tax revenue grew by 39.9% to Rs. 4.6 lakh crores, with income tax collections jumping by 49.9% to Rs. 2.9 lakh crores and corporate tax collections rising by 26.2% to Rs. 1.7 lakh crores. Indirect tax collections also saw a 7.9% increase to Rs. 3.7 lakh crores, with GST collections rising by 10.6% to Rs. 2.3 lakh crores. However, customs and union excise duties declined by 4.3% and 0.9%, respectively.

Spending Momentum Slowing
Government spending, after a slow start in the first two months of FY25, gained some momentum. In Q1 FY25, the government achieved 20.4% (Rs. 9.7 lakh crores) of its targeted expenditure estimate, slightly lower than the 23.3% achieved in the same period last year. Capital expenditure remained subdued at 16.3% of BE, down from 27.8% last year, while revenue expenditure held steady at nearly 22%. Government subsidies in Q1 FY25 accounted for 24% of BE, marginally higher than the 23% of BE last year. Notably, food subsidy disbursements stood at 30% of FY25 BE, up from 21% last year, whereas petroleum subsidies were significantly lower at 3% of BE compared to 17% in Q1 FY24.

In terms of year-on-year growth, overall expenditure growth declined by 7.7% in Q1 FY25, a sharp contrast to the 10.8% increase in Q1 FY24, primarily due to a 35% drop in capital expenditure.

Fiscal Deficit
Ultimately, the centre's fiscal deficit in Q1 FY25 was Rs. 1.36 lakh crores, just 8.1% of the total budgeted for FY25, a substantial decrease from the 25.3% recorded in Q1 FY24. This reduction is largely credited to the buoyant growth in revenue receipts, underscoring the government's focus on fiscal prudence and efficient tax collection.