Budget expected to focus on capex, rural demand and support to state governments: IDFC First’s Gaura Sen Gupta

The RBI dividend which was significantly higher than expected has provided fiscal space of 0.4 percent of the gross domestic product (GDP). Some of this fiscal space will be channelled into higher expenditure on rural areas and enhanced support to state governments. Some of the fiscal space will counter potential shortfalls in disinvestment and telecom receipts. Incorporating all these factors, there is space to reduce the fiscal deficit target to 5 percent of GDP versus the interim budget target of 5.1 percent.

Our estimate incorporates an upward revision in nominal GDP growth to 11.5 percent from the interim budget estimate of 11 percent (on actual FY24). This reflects upward revision in real GDP growth.

How would the budget work around capex? In the interim budget, the capex target was set at Rs 11.10 lakh crore. How do you see this panning out?

The budget will continue to focus on capex and we expect the target to be retained at Rs 11.1 lakh crore. The recovery in the capex cycle has been led by expenditure by both the central and state governments in FY24. In FY25, continued support will be required as private capex recovery is expected to be gradual.

The capex target in the budget could increase with interest-free loans to state governments rising. Under the interim budget, Rs 1.3 lakh crore was allocated for capex loans to state governments.

Which sectors would the government focus on in the budget announcements?

The focus is likely to be on capex, rural demand and support to state governments. Rural demand has been on a weak footing due to an uneven monsoon last year. The allocation towards agriculture and rural was kept steady at 1.3 percent of GDP in the interim budget (same as FY24). There could be increased allocation towards schemes such as NREGA (referring to the rural job guarantee scheme under the Mahatma Gandhi National Rural Employment Guarantee Act), (farmer's income support scheme) PM Kisan and rural housing.

The budget is expected to remain supportive towards capital expenditure in FY25. Private sector capex recovery remains tentative as consumption growth has been subdued. Hence, continued support from the government for capex remains important. The allocation for capex loans to states could be increased from the current Rs 1.3 lakh crore.

In FY25 we expect the focus on just-in-time cash management for expenditure on schemes to persist. In the next phase, funds will be released in a treasury account with the RBI directly versus the current practise of releasing funds in a commercial bank account.

As per press reports, there could be a special package announced for a few states, the fiscal cost for which is uncertain. That said, the RBI dividend which was significantly higher than expected minimises fiscal slippage risks.

Will the government keep borrowings at the same level or can we see some changes?

The RBI dividend has resulted in a sharp rise in government cash surplus. The Centre has already reduced borrowings via treasury bills with the H1FY25 calendar much lower than estimated.

Full-year T-bill issuance is likely to be closer to Rs 12000 crore, even after building a pick-up in issuances in H2FY25. Our fiscal deficit estimate of 5 percent of GDP indicates that net G-Sec (government security) issuance can be reduced by Rs 33,000 crore to Rs 10.2 lakh crore.

During the pre-budget meetings with industry participants, there were suggestions to create a capex fund using part of the RBI dividend and keep disinvestment out of the budget. How do you see this working?

Creating a capex fund to mobilise additional resources for capital expenditure, especially for the private sector, would be a step in the right. That said, keeping disinvestment proceeds and the RBI dividend outside the budget permanently reduces the flexibility available to the Centre to keep the fiscal deficit in check.

Diversification of sources of revenue to fund fiscal expenditure also minimises fiscal slippage risk. In FY24, net tax revenues accounted for 83 percent of total receipts and non-tax revenues plus non-debt capital receipts 17 percent of total revenues.