By Dhiraj Relli, MD & CEO at HDFC Securities
The FY25 interim Budget has come out a little better-than-expected even though the heightened expectations on many changes/giveaways have rightfully not been met now. The biggest feature of the interim budget was the absence of populism. The prudent resolve by the government to continue the fiscal consolidation path will be appreciated by global and local investors.
Better-than-street expectations of fiscal deficit for FY24 and FY25 (5.8 percent and 5.1 percent of GDP, respectively) and the consequent lower borrowings target in FY25 (Rs 14.1 lakh crore versus Rs 15.4 lakh crore in FY24) have enthused the bond markets (10-year G-Sec yield down 8 bps) and led to a rise in stock prices of PSU Banks who have the maximum exposure to the government bonds. Lower borrowings due to deficit compression could reduce borrowing costs for the private sector and help investment recovery.
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Fiscal deficit: FY24RE (Revised Estimate) fiscal deficit will come in at 5.8 percent vs 5.9 percent in FY24BE. This has been made possible despite the lower nominal GDP growth (8.9 percent versus 10.5 percent in FY24BE (Budget Estimate)) and due to healthy collections in direct taxes and GST and higher than expected RBI dividends. This has offset the lower divestment income. Lower customs and excise duty collections and higher spending on MNREGA, food, and fertilizer subsidies. The buoyancy in tax revenues was particularly encouraging with the tax-to-GDP ratio coming in at 11.6 percent compared to the 11.1 percent assumed in the FY24 budget.
Capex: Capex spend allocation has risen 11.1 percent in FY25 over the FY24BE and 16.9 percent over FY24RE. However, the budgeted increase in capital expenditure of about Rs 1.6 lakh crore in 2024-25 is lower than the actual increase of Rs 2.4 lakh crore this year over 2022-23. Major scheme outlays show higher growth in allocations for social welfare schemes including education and health.
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Opportunities: Sectorally, financials (including PSU Banks) could perform well in the near term. Apart from this, companies exposed to rural and affordable housing can also do well over the medium term. Dairy and fishery companies may receive a fillip after some time.
Challenges: Disinvestments and asset monetization remain a problem area, yielding Rs 20,000 crore less than budgeted in FY24. The target for FY25 is set at Rs 50,000 crore.
All in all, we think the impact of the interim budget for the next few days on equity markets will be neutral to mildly positive, and other emerging triggers (including the balance Q3 results) will drive its trajectory later. Larger moves in the markets may have to wait till the full-fledged Budget due in June/July.
We expect the 10-year yield to move below seven percent over the coming months, supported by expectations of a rate cut by the RBI, lower US bond yields, stabilizing inflation prints, and debt flows on account of the inclusion in the JP Morgan bond index.
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