Economy Update : Government spending picks up pace in June by Kotak Institutional Equities
Government spending picks up pace in June
The central government’s fiscal deficit in 1QFY25 remained low at 8.4% of FY2025BE, aided by strong direct tax collection growth and a slow spending pace. Income tax growth was strong at 50% in 1QFY25. While the pace of spending picked up in June after a slow pace during the election, the pace of capex remains slow. We expect the government to achieve its FY2025BE GFD/GDP target of 4.9%.
Tax collections buoyed by direct taxes in 1QFY25
Central government’s total receipts were at 26% of FY2025BE in 1QFY25, 39% higher than 1QFY24, led by direct taxes and RBI surplus transfer (Exhibit 1). Gross tax revenue was 22% of FY2025BE (24% higher than 1QY24), driven mainly by income tax collections at 25% of FY2025BE (50% higher than 1QFY24). Corporate tax collection in 1QFY25 was 17% of FY2025BE (26% lower than 1QFY24).
Indirect tax growth was relatively tepid at 5.5%. Customs duty collection growth was (-)4.3% and excise duty collection growth was (-)0.9%. GST collection growth was 9.1%. Non-tax revenue was 51% of FY2025BE.
Pace of expenditure slow in 1QFY25; picks up in June
Center’s expenditure in 1QFY25 was 20% of FY2025BE (7.7% lower than 1QFY24). However, the pace picked up in June, with expenditure increasing 73% mom on the back of revenue expenditure at 99% mom. Revenue expenditure was 21% of FY2025BE (2.2% higher than 1QFY24).
Capital expenditure in 1QFY25 at 16% of FY2025BE (35% lower) has been slow due to the elections, but remained sluggish at 16% lower mom in June too. The slow pace of capex was visible across (1) roads at 22% of FY2025BE (40% lower), (2) railways at 26% of FY2025BE (15% lower), (3) defense at 8% of FY2025BE (25% lower) and (4) loans to states for capex at 12% of FY2025BE (Exhibit 1).
Government will keep FY2025 GFD/GDP within 4.9%
Center’s fiscal deficit in 1QFY25 remained low at 8.4% of FY2025BE. We expect revenue collections to largely be in line with the FY2025 budget targets. Corporate tax growth will likely pick up from August, a trend seen in FY2024 too. Income tax growth should remain strong and could surprise on the upside, possibly offsetting shortfalls in divestment or customs duty collections. On the expenditure side, the government has some buffers to modulate spending. This provides some flexibility in keeping GFD/GDP within the 4.9% target (Exhibit 2). We do not pencil in any changes to the borrowings for now.
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