The budget for 2024-25 (FY25) is a dream budget for economists. By staying fiscally conservative (lower-than expected fiscal deficit to GDP ratios for FY24 and FY25, lower-than-expected market borrowings for FY25 and non-rosy assumptions for tax receipts), the government has highlighted the importance of fiscal discipline.
This was absolutely needed, as India’s public debt is expected to rise to 82.3 percent of GDP by FY25, as per the IMF’s assessment. This relatively aggressive path for fiscal consolidation is facilitated not just by the nation’s smarter recovery from the pandemic but also by the improved sense of ‘political stability.’ Very rarely one has seen an interim budget devoid of populist measures in an election year.
Despite a growth of 12.5 percent in the gross tax revenue (revised over actual) in FY24, the government has pegged its growth at 11.5 percent in FY25, aligning it with the expected nominal GDP growth of 10.5 percent. Given the increased economic uncertainty during FY25 (due to global slowdown, climate risks, geopolitical stresses, etc.), we would bifurcate the nominal GDP growth into a real GDP growth of 6 percent and an inflation of 4.5 percent. This looks reasonable given that the RBI has broken the back of inflation through its sustained monetary tightening.
What is noteworthy is that the government is trying to achieve fiscal consolidation without compromising the quality of public expenditure. While the current expenditure is expected to increase marginally by 3.5 percent in FY25 (budgeted over revised), the capital spending by the government is budgeted to grow by 16.9 percent in FY25 over the revised print for FY24. This will take the government’s capex to Rs 11.11 trillion in FY25, which will be 3.4 percent of GDP versus 2.5 percent in FY22.
In FY24, a huge shortfall of disinvestment receipts (actual at Rs 300 billion versus the budgeted Rs 610 billion) was compensated by a much higher dividend by the RBI, banks and FIs to the tune of Rs 1,044 billion versus the budgeted Rs 480 billion. While the RBI could garner substantial profits during FY24 in foreign-currency trading and by lending more to the banking system at higher interest rates, the banking system too benefited from a faster expansion of net interest margins. By assuming the same phenomena to continue in the next year, the government has budgeted the ‘dividend from RBI/banks/FIs’ at Rs 1,020 billion in FY25.
As the government has managed to reduce the fiscal deficit to 5.8 percent in FY24 (versus the budgeted at 5.9 percent) and intends to lower it further to 5.1 percent in FY25 (versus the market expectation of 5.4 percent-5.5 percent), the net market borrowings (G-Sec) are pegged at Rs 11.752 trillion in FY25 versus Rs 11.805 trillion in FY24. This has fueled a rally in the bonds market without any monetary easing.
From the expenditure side, continued spending on infrastructure, MGNREGA and a boost to rural housing and agri-allied activities will certainly act as income stabilisers in a bad agricultural year (patchy monsoon, low water reservoir levels, etc.).
By presenting a fiscally prudent ‘interim budget,’ the government has underscored the role of ‘fiscal discipline’ in supporting economic stability. This will help India maintain financial stability at times of heightened market stress.
Dr Rupa Rege Nitsure is Chief Economist, L&T Finance Holdings Ltd. Views are personal, and do not represent the stand of this publication.
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