By Radhika Rao, Executive Director and Senior Economist, DBS Bank
As we approach the final budget for FY25, three developments are shaping market expectations.
Firstly, the government has accumulated a significant revenue buffer, bolstered by robust direct and indirect tax collections. Additionally, a record-high surplus transfer from the RBI amounting to Rs 2.1 lakh crore (~0.6% of GDP) for FY24, far exceeding last year's Rs 87,400 crore and the budgeted Rs 85,000 crore, adds to this fiscal cushion.
This unexpected windfall provides an opportunity for the government to potentially reduce the full-year deficit from the targeted -5.1% of GDP for FY24. However, its impact will depend on whether this surplus is primarily used to strengthen fiscal consolidation or to cover increased spending commitments and any shortfall in divestment proceeds.
Second, there were the election results. The ruling BJP National Democratic Alliance (NDA) coalition returned for a third successive term, but with a narrower margin of win than the exit polls had suggested. This has increased the focus on the upcoming Budget, especially whether it would contain more demand-accretive measures to support households’ consumption and purchasing power besides a focus on the agricultural sector.
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Lastly, the inclusion of the bond index expands the pool of investors in the debt markets to include more passive foreign portfolio investors. This is expected to boost borrowing opportunities this year. Since the announcement of the inclusion, approximately $10 billion has already flowed into India's sovereign debt market. Analysts predict that an additional $18-20 billion in fresh investments could follow over the coming year.
India's comparatively higher yields compared to other index constituents may attract active fund managers to increase their holdings in these bonds, alongside the dedicated passive investors.
Against this backdrop, we expect a short-term and long-term focus in the upcoming Budget.
With a short-term lens, spending will be prioritised toward low-income people, youth, women, and farmers. After a record heatwave, the southwest monsoon started on a weak note but is expected to improve, with its geographical trend impacting farm output GVA growth, which averaged a feeble 0.7 percent YoY in FY24.
Direct support for farmers via inputs including fertilizers, higher crop insurance, and investments towards food processing are in the offing, together with the already announced increase in MSPs for kharif crops.
Markets are likely to focus on disbursements towards the core and core of the core schemes, which include programs covering public health infrastructure, rural housing, farming communities, and a push towards sanitation and cleanliness. Allocations towards a few of these programs had been trimmed in the revised FY24 outlay but increased in the FY25 interim presentation.
To contain the spillover impact on food prices, the government plans to add 16 new commodities to its price monitoring list, increasing the total to 38. Stock limits on wheat have been re-introduced and will stay in place till March 2026. Income tax cuts for specific categories (for instance on incomes over Rs 15 lakh) might also be on the cards to boost disposable incomes. Subsidy allocations are likely to stay at similar levels as the interim budget.
Adopting a more medium-term lens, the unwavering focus on improving the quality of spending towards higher capital expenditure is expected to stay on track. The gross fixed capital formation ratio to GDP has risen north of 31 percent in FY24 but is still below the FY12 peak.
A large part of the increase in capital expenditure by direct government and non-corporate private (households) has been concentrated in construction (of infrastructure projects) and real estate reflected in ‘dwellings and structures’ under the GDP series, with higher private corporate participation expected to provide a boost to ‘machinery and equipment’. Further tweaks to the PLI scheme and other incentives to better target the intended sectors, expand to a few ancillary segments and widen the scope to include more labour-intensive sectors. Ease disbursements (cumulative Rs 9,700 crore disbursed by end FY24) are also likely to be under consideration.
Key factors of production will be the other area of focus. To be effective, the centre is likely to seek cooperation from the states to pursue land and labour regulations. On the latter, most states have prepared draft regulations and are waiting for the buy-in of others to harmonise regulations across the board. Agricultural sector reforms are contentious but necessary to lift and improve the state of the ~40 percent of households dependent on farming income. Lastly, incremental reforms are not limited to the Budget and are expected to continue beyond July. A good balance between supply-side investments and boosting demand will also ensure a more inclusive as well as widening growth and development agenda.
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