By- K. Ravichandran
The Union Budget for FY2025 continued a slew of announcements, which offer a peek into the focus of the government over the medium term, including employment, skilling, MSMEs and infrastructure. The execution of these announcements can help sustain the buoyancy in economic growth that the country has seen over the last two years.
The budget math largely panned out along expected lines. The Government of India (GoI) used a portion of the leeway on the revenue side on account of the unexpectedly large RBI dividend to raise its revenue expenditure and forego some tax revenues, while using the remaining amount to cut back on the fiscal deficit number. The latter is pegged at 4.9% of GDP for FY2025, as against the 5.1% pencilled in the Interim Budget. However, this only translated into a Rs. 120 billion cut in net market borrowings, much lower than our expectations for the same. Nevertheless, with the demand-supply dynamics for G-secs remaining favourable owing to the bond index inclusion related inflows, and modest albeit somewhat distant rate cuts, corporate borrowing costs are unlikely to run up sharply during the rest of the fiscal.
While the GoI retained its capex target of Rs. 11.1 trillion for FY2025, it made some tweaks in the distribution of this amount. For instance, it raised the expenditure under the interest free capex loan to states to Rs. 1.5 trillion from Rs. 1.3 trillion in the Interim Budget. However, it kept the capex by the MoRTH and Railway Ministry unchanged vis-à-vis the Interim Budget levels, thereby keeping the growth rates muted at just 3-4%. This is surprising given the numerous announcements of rural and urban roads. Additionally, it also continued with the large allocation of Rs. 0.6 trillion under the head of ‘new schemes’ without providing any explanation for the same.
Notwithstanding, the GoI’s continued focus on capex and infrastructure creation augurs well and is expected to boost demand across a large set of industries over the medium term. The announcements pertaining to new road connectivity projects, construction of new highways in Bihar, launch of the phase 4 of the PMGSY, focus on improving road connectivity in the Eastern part of the country, building of 30 million additional houses under the PMAY, and the creation of water supply, sewerage treatment and storm water drainage service for 100 large cities augur well for the construction, engineering, capital goods, cement and CV sectors.
The budget contained several announcements to support MSMEs. Most importantly, it introduced a credit guarantee scheme to facilitate loans for the purchase of machinery and equipment without collateral or third-party guarantee, by providing a guarantee cover to the tune of Rs. 1.0 billion. Additionally, it also highlighted that it would ensure credit availability to MSMEs in the SMA stage, by providing a guarantee through a government promoted fund, to prevent them getting into the NPA stage. Moreover, it doubled the limit of Mudra loans for a category of borrowers, halved the turnover threshold of buyers for mandatory onboarding on the TReDS platform, and announced the expansion of SIDBI branches in all major MSME clusters.
The implementation of these measures would play an important role in ensuring credit flow and reduce the cost of funds for MSMEs, thereby supporting manufacturing output and exports, as well as job creation, particularly in sectors such as the auto ancillary industry. From the point of view of the lenders, the credit guarantee scheme would support credit demand and asset quality.
Interestingly, the Budget lays significant emphasis on employment and skilling. It has introduced a multi-year package amounting to Rs. 2.0 trillion to fund employment linked incentives and internships, which is expected to benefit a large population base. These cover measures such as wage subsidies for first timers with salaries of upto Rs. 0.1 million/month, incentives to workers and employers in the manufacturing sector, as well as reimbursement of EPFO contributions of employers that increase their employee count. Additionally, the GoI would also facilitate internships for 10 million youth via monthly allowances and permitting corporates to bear training costs from their CSR funds. These measures would play an important role in supporting employment generation in the medium term.
On the financial markets front, rise in LTCG on listed equities to 12.5% from 10%, and STCG to 20% from 15%, and rise in STT on F&O positions, may impact market sentiment in the near term, which would impact capital market focused businesses. Nonetheless, given the strong earnings growth prospects for the major listed entities in the medium term, and continuing surge in retail flows, sentiment should recover gradually which should help these businesses.
Finally, the GoI also provided a glance into the set of next generation reforms that are on the table. These include the creation of an overarching Economic Policy Framework to highlight its approach to economic development, reforms for improving the productivity of factors of production such as land, labour, capital, entrepreneurship. While the fine print is awaited, the progress on this front would be crucial to boost India’s medium term growth potential and transform the economy.
(K. Ravichandran, Executive Vice President & Chief Ratings Officer, ICRA Limited)
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