The Budget 2025 is undeniably the most anticipated event over the next 10 days. While the recent slowdown in growth and elevated inflation levels continue to worry consumers, the question is what can help jumpstart the economy? Well, UBS says the focus needs to be on capex, consumption and employment but within fiscal boundaries. They do not “expect any changes in the tax policy, especially for capital markets,” in their base case.
Tanvee Gupta Jain, Chief India Economist at UBS Securities expects “capex to grow slightly better than nominal GDP at 12-14% YoY (with a focus on roads & highways, railways and defence), supported by a higher transfer of interest free capex loans to states (with relaxed guidelines).”
Additionally in a bid to boost disposable income and discretionary consumption, “they also expect some adjustment in income tax for middle-class households. We also expect spending (as % of GDP) on welfare schemes to largely stabilise. We still expect the government to increase allocations to boost job creation and skills, and to expand the production-linked incentive (PLI) scheme to include new sectors in a bid to boost manufacturing, along with other measures.”
Budget 2025 expectations: Big measures on the card
Given recent soft patch in domestic growth and elevated global uncertainty and inflation levels, the key policy measures that UBS expects include-
-Slight improvement in fiscal deficit as % of GDP to 4.8% (Vs the Budget estimate of 4.9%)
-Expect pace of fiscal consolidation to slow down and Govt target a fiscal deficit of 4.4% of GDP
-From FY27E, Govt may shift to a new medium-term fiscal consolidation path linked to reductions in central government debt as % of GDP.
According to Jain, the fiscal consolidation linked to cut in debt as a percent of GDP will offer, “flexibility to decide on an appropriate fiscal trajectory based on domestic and global growth dynamics. Overall we expect government capital spending to pick up next year which coupled with shallow monetary easing (our base case is 75bp) should help support real GDP growth of 6.3% YoY in FY26.”
Budget 2025 expectations: Revenue collection may improve marginally
Speaking on the tax collection, UBS estimates that “gross tax revenue collection may grow 11.5-12.0% YoY in FY26e. This compared to 10.7% growth clocked between April and November 2024.
As per the first advance estimate, nominal GDP is seen growing 9.7%YoY in FY25, UBS expects this to improve further and scae past the 10% number to record 10.5% growth YoY in FY26e.
In other key revenue collection that UBS is focussing, they expect that the “non-tax revenue collection at 1.5% of GDP in FY26E Vs 1.7% in FY25E.” This slight dip is purely because of the adjustments as a result of normalisation of the dividend transfers by the RBI. As divestment receipts have lagged by Rs 9000 crore so far in FY25 despite the government’s forecast of Rs 50000 crore in FY25, they “expect the administration to maintain a lower target of Rs 30000 crore for FY26.”