With the the Union Finance Minister Nirmala Sitharaman all set to present the interim Budget for the fiscal year 2024-25 on February 1, 2024, an analysis by ICRA suggested that the government is likely to target fiscal deficit at 5.3 per cent of GDP for FY2025, entailing a reasonable degree of fiscal consolidation amid slower capex growth.
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The upcoming Budget will be an interim one and is said to have no major announcements as it is coinciding with the general elections year which is scheduled for this year. The full budget for the fiscal year 2024-25 will be presented after the formation of the new government following the general elections. The Budget is allotted for the upcoming fiscal year, which runs from 1st April to 31st March of the next year.
However, the expansion in the Government of India’s (GoI’s) capex and the extent of fiscal consolidation would be scrutinised closely, given the implications for growth and G-sec yields, respectively. ICRA expects the fiscal deficit target for FY2025 to be set at 5.3 per cent of GDP, midway through the expected print of 6.0 per cent for FY2024 and the medium-term target of sub-4.5 per cent by FY2026. “This, along with our projection of an appreciable dip in the revenue deficit, would allow for a capex target of Rs 10.2 trillion for FY2025, 10 per cent higher than the expected level for FY2024 vis-à-vis the 20 per cent-plus YoY expansion seen during FY2021-FY2024. A higher capex target would impinge on the GoI’s ability to bridge half the required fiscal consolidation in FY2025, thereby making the task of reaching medium-term fiscal deficit target by FY2026 even more challenging,” ICRA said in a report.
What are the expectations from Interim Budget for FY24
Per a report by ICRA, the GoI’s revenue receipts are likely to exceed the FY2024 Budget Estimate (BE) by ~Rs 0.5 trillion, largely driven by the overshooting in net tax and non-tax revenues. On the expenditure side, it said that the total spending is expected to remain largely in line with the FY2024 BE of Rs 45.0 trillion, with a lower-than budgeted capital expenditure partially offsetting the projected overshooting in revenue expenditure (by +Rs. 800 billion) vis-à-vis the budgeted target for the fiscal.
Further, it said that the fiscal deficit is unlikely to overshoot the FY2024 BE of Rs 17.9 trillion. However, a lower nominal GDP number than what the Union Budget had pencilled in (NSO’s first advance estimates: Rs 296.6 trillion vs. FY2024 BE: Rs 301.8 trillion), is likely to result in the fiscal deficit printing at 6.0 per cent of GDP. This, along with the robust inflows into small savings schemes, suggest that the GoI’s market borrowings are likely to remain in line with the budgeted amount for FY2024 (gross: Rs 15.4 trillion; net: Rs 11.8 trillion).
What are the expectations from Interim Budget for FY25
Given the favourable macroeconomic backdrop and expectations of the benign domestic environment sustaining in the next fiscal, per the analysis by ICRA, the GoI is expected to continue on the fiscal consolidation path in the Union Budget for FY2025. However, it added that this is likely to entail a slower expansion in capex vis-à-vis that seen in the post-Covid years, which could weigh on the growth in economic activity. Additionally, with the upcoming Budget set to be an interim one for the purpose of a vote-on-account, major policy changes and announcements are unlikely at this juncture, it said.
“We expect the GoI’s gross tax revenues (GTR) to grow by a healthy 11 per cent in FY2025, led by direct taxes and GST collections, even as the growth in excise and customs duty collections is likely to be subdued,” it said.
The disinvestment target is likely to be pegged at sub-Rs 500 billion for FY2025. Given the uncertainties involved in market transactions, it would be prudent to set a moderate target of sub-Rs 500 billion for FY2025, instead of a higher aim that may disrupt the budget math if there is a large shortfall in such receipts by the end of the fiscal, based on the past year trends.
Furthermore, ICRA expects the revenue expenditure to increase by a modest ~4 per cent in FY2025, led by a moderate growth in interest payments amid a slight moderation in allocation for subsidies and a continued focus on curtailment of other expenses. It added, “We estimate the GoI to budget for a capex of Rs 10.2 trillion in FY2025, implying a relatively sedate YoY expansion of ~10 per cent, compared to over 20 per cent expansion seen in each of post-Covid years. The slowdown in capex growth is likely to have some bearing on economic activity and GDP growth.”
As already mentioned above, ICRA expects the GoI to target a fiscal deficit of 5.3 per cent of GDP in FY2025, midway through the expected print of 6.0 per cent in FY2024 and the medium-term target of 4.5 per cent for FY2026.
For FY2025, the 15th Finance Commission (FC) had recommended a normal borrowing limit of 3.0 per cent of the Gross State Domestic Product (GSDP) for the state governments. Given this and ICRA’s expectations of the GoI’s fiscal deficit, the General Government deficit is likely to dip to 8.3 per cent of GDP in FY2025 from 9.2 per cent of GDP expected in FY2024. This would be the lowest level of the General Government deficit since FY2020 (7.2 per cent of GDP).
Net General Government dated market borrowings for FY2025 are pegged to rise to Rs 18.6 trillion, marginally higher than the Rs 18.5 trillion projected for FY2024. With larger redemptions of G-sec and SGS, gross borrowings are estimated to rise by 2.1 per cent to Rs 25.5 trillion in FY2025 from the projected Rs 25.0 trillion in FY2024. Overall, largely stable market borrowings, along with inflows on account of bond index inclusion, are expected to augur well for yields, ICRA said.