Union Budget: Achieving fiscal discipline and supporting growth

Budget

The Union Budget for FY2025-26 is set to be presented on February 1, 2025, by Finance Minister Nirmala Sitharaman. This will be her eighth budget presentation, continuing the tradition of unveiling the budget on the first day of February.

The Indian economy has been performing reasonably well, but the global economy is currently facing numerous challenges that significantly impact national budgets and economic policies. Additionally, geopolitical tensions, such as the conflict in Ukraine and Gaza, have led to volatility in energy prices and trade disruptions. Central banks/ Governments around the world are grappling with the challenge of balancing inflation control with the need to support economic growth.

Given this backdrop, the Indian real GDP growth in FY2023-24 was at 8.2%. However, the first advance estimates of NSO for real GDP growth for FY2024-25 are considerably lower at 6.4%, below the RBI projection of 6.6%. Moreover, the nominal GDP growth is also projected lower at 9.7% in FY2024-25, compared to the budget estimate of 10.5%.

Direct tax revenue has seen robust growth of 16.45% till December 17, 2024. Overall, net tax receipts have grown by 10.7% till November 2024, broadly in line with budget estimates for FY2024-25. We expect net tax receipts to increase by approximately 11% in FY2025-26. The government is likely to set a moderate disinvestment target pegged at Rs 40,000-50,000 crores for FY2025-26. We also believe that non-tax revenues (led by RBI dividend) will continue to aid Government finances in FY2025-26.

We expect the government to aim for revenue expenditure growth of 6-7% and budget for a capex of approximately Rs 11 lakh crore for FY2025-26. It is also likely that normalization of revenue expenditure might be offset by an increase in budgeted capex. Due to the election year in FY2024-25, the pace of capital expenditure was lower in the first half, and we anticipate the spend on capex to be lower by approximately Rs 1.50 lakh crores in FY2024-25 against the budgeted number of Rs 11.11 lakh crores.

In her last budget speech, the Finance Minister mentioned that the Central Government aimed to reach a fiscal deficit of less than 4.5% by FY2025-26, she also announced targeting a declining Central Government Debt-GDP ratio from FY2026-27 onwards. Given this backdrop, we expect a fiscal deficit of ~4.4% of GDP for FY2025-26, with net borrowings of Rs 11.50-12.00 lakh crore. This projection assumes a nominal GDP growth rate of 10.5% year-on-year. Moreover, we expect the government’s gross borrowing at Rs 14.20-14.60 lakh crore for FY2025-26, slightly higher than Rs 14.01 lakh crores for FY2024-25. However, if the government continues to buy back the dated securities for FY2025-26 maturities, we expect this amount can reduce up to Rs 0.40-0.50 lakh crore. We also expect a healthy balance between demand and supply for sovereign bonds in FY2025-26.

The upcoming budget will be closely followed by the RBI's policy meeting on February 7. This will be the first policy of the new RBI Governor, Sanjay Malhotra. The RBI has to handle the tough trinity of depreciating currency, tight liquidity conditions, and moderating growth. We expect the RBI to continue various measures to ease liquidity conditions. We also assign a good probability of a policy rate cut by 25 bps, considering the current growth-inflation dynamics in the Indian economy.

Overall, the Union Budget FY2026 is anticipated to strike a careful balance between fiscal discipline and growth priorities. By emphasizing capital expenditure and infrastructure development, the Government of India aims to drive economic recovery while maintaining sustainable fiscal management. A fiscally prudent central government, along with the expected easing cycle, bodes well for the Indian fixed income market in the near to medium term.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.