By Aditi Nayar
The FY25 Union Budget is much awaited on multiple counts. It is the first Budget of the government after the 2024 general elections, and the penultimate one as far as the medium-term fiscal road map ending in FY26 is concerned.
We got a sneak peek into what this Budget may hold, from the Interim Budget for FY25 that was presented in February. This was a Vote On Account for April-August, which can be thought of as getting Parliament’s approval for business-as-usual activities to continue through the election period. This Vote On Account had placed the government of India’s (GoI’s) fiscal deficit at a five-year low 5.1% of GDP in FY25, a considerable pullback from the 9.2% of GDP scaled in FY21 during the Covid-19 pandemic, and within eyeshot of the medium-term target of bringing it below 4.5% of GDP by FY26.
Our assessment suggests that the GoI’s revenue receipts will comfortably exceed the target set in the Interim Budget Estimate (IBE) for FY25 by around Rs 1.2 trillion, led by the dividend from the Reserve Bank of India and net tax receipts. We anticipate a modest upside in both direct and indirect taxes, in gross terms, a portion of which will have to be shared by the states, leaving mildly higher net tax revenues for the GoI. How should this tax and non-tax upside be channeled?
The usual obvious answer from an economist would be to expand growth-inducing capital expenditure. However, FY25 is a distinct year, given the transient dip in activity in certain sectors during the phased parliamentary elections, including the GoI’s capex. As against the fairly handsome embedded growth target of 17% for FY25 (over FY24, provisional), the GoI’s capex unfortunately, albeit expectedly, declined by 14% in year-on-year (YoY) terms in April-May FY25. Given this, and the typically compressed execution during the monsoon months, we fear that the required monthly run rate in H2 FY25 already poses a tough ask. Accordingly, it may be more realistic to retain the capital expenditure target of Rs 11.1 trillion for FY25.
The GoI had allocated Rs 0.7 trillion for “new schemes” under the finance ministry capex in the FY25 IBE, the details of which were not disclosed. This amount is likely to be redistributed to raise the capex of some ministries, such as roads and highways, and railways, which had seen muted 3-4% hikes in their capex allocations in the FY25 IBE vis-à-vis their provisional numbers for FY24.
Moreover, the GoI could raise the budgeted target for revenue expenditure compared to the IBE, either to bring in a new scheme or to increase the outlay for some of the existing schemes. New schemes take time to implement, and their actual outgo in the first year tends to be quite modest, restricted to a quarter or two. We anticipate the allocation for non-interest non-subsidy revenue expenditure could be enhanced by Rs 500-600 billion vis-à-vis the IBE. This could be focused on the rural economy, to partly mollify some of the negative spillovers of the inadequate and uneven monsoon that was seen in 2023. This may also help to address some of the admitted unevenness in economic growth and consumption that has been observed in the recent quarters.
The balance revenue upside could be used to pare the GoI’s fiscal deficit to 4.9-5% of GDP in the full Budget for FY25 as against the target of 5.1% of GDP mentioned in the IBE. In turn, the Centre’s gross and net market issuances could then be reduced by `350-550 billion for H2 FY25. Along with the demand boost for government securities (G-secs) owing to the bond index inclusion, a lower borrowing figure for H2 could decisively help cap the 10-year G-sec yield at 7%.
The GoI is likely to issue a fresh medium-term fiscal consolidation road map in the Budget. Assuming that gross capex is kept unchanged at 3.4% of GDP over the medium term, in line with the FY25 IBE, a fiscal deficit target of 3% would imply that the GoI would effectively need to aim to run a mild revenue surplus. While optimal and desirable, this would be quite challenging in practical terms. We believe that determination of the end point of the medium-term fiscal consolidation should factor in the substantial “on-budgeting” of off-budget capex that has taken place over the last few years. Accordingly, the GoI should consider paring the fiscal deficit to 4% of GDP over the medium term as against the Fiscal Responsibility and Budget Management target of 3%.
The next big event on the radar after the Union Budget will be the Monetary Policy Committee’s August 2024 policy review. The foregone conclusion is that last year’s high growth print (+8.2% for GDP and +7.2% for gross value added), combined with an expected inflation of nearly 5% in Q1 FY25 and a frustratingly uneven progress of the monsoon in June 2024, will not shift the voting pattern of the four members who voted for status quo in the June meeting towards a change in stance or rate cut in this meeting itself.
Market expectations of the onset of the rate cut cycle seem to be distributed all the way from October 2024 to April 2025 or later. Our own base case is a stance change in October and a 25 basis point rate cut each in December 2024 and February 2025, followed by an extended pause, implying a rather shallow rate-cut cycle. Regardless, this is predicated on a normal magnitude and favourable distribution of rainfall in the rest of the monsoon season, as well as no other shocks, either global or domestic. A fiscally prudent Budget would, in our view, offer some solace given the continuing risks to the inflation trajectory and inflation expectations posed by food and commodity prices.
The author serves as the Chief Economist and Head of Research & Outreach at ICRA.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com Reproducing this content without permission is prohibited.