Interim Budget to be non-event, don't expect major move on tax mobilisation, rationalisation

Madhavi Arora is the lead economist at Emkay Global

The upcoming interim budget would be short of any big bang announcements but would be watched for pace of fiscal consolidation and policy priorities along the road ahead. While economic trade-offs stay challenging amid reducing fiscal impulse to growth, the policy prerogatives and spirit will not be derailed.

Although the risk of competitive populism has abated at the central level, we do expect few relief measures for the rural/farm/welfare sector.

Interim budget a non-event, yet an important policy signalling tool

The upcoming budget, being interim in nature, would likely to be a non-event as far as big-bag announcements, new tax or spending pitches are concerned. However, it will still set the stage for policy choices ahead and will be watched out for pace of fiscal consolidation and policy priorities on capex and non-capex spend.

We expect the policy direction and prerogatives to remain largely similar to recent budgets, as the trade-offs remain between nurturing the growth recovery and diminishing fiscal space with challenging debt dynamics. Besides, improving intersection of politics and economics implies that political capital is no longer as compromised around the election cycles as perceived.

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Steady consolidation ahead: FY25 GFD/GDP poised to tighten to 5.4 percent versus 5.9 percent in FY24

Amid various push and pull, FY24 GFD/GDP could just about balance at 5.9 percent as budgeted. The positives buffers such as (1) robust tax collection, (2) super-normal RBI dividend, (3) mild capex cuts (4) expenditure jig etc, would offset (1) higher payouts than budgeted on food, fertiliser subsidy, (2) miss on ambitious divestment targets, (3) lower nominal GDP growth. GFD is gross fiscal deficit.

For FY25, we model steady consolidation of 0.5-0.6 percent and see GFD/GDP at 5.4 percent. The scope of too populist looks to be bleak amid moderating tax revenue growth and high committed revenue expenditure (revex) and heavy market borrowings and of course the nature of interim budget.

The asset sale print will likely remain below Rs 50,000 crore, while the RBI dividend would be viewed closely. We assume a 10.5 percent nominal GDP growth. A more aggressive nominal GDP assumption in budget could make government balances look optically better.

FY25E Capex/GDP to rise further to 3.3 percent; Revex focus on rural, welfare spending

The Centre’s Capex/GDP ratio will likely rise to 3.3 percent - almost 1.6-ppint  higher than pre-pandemic ratio, even as capex growth may normalize to sub 15 percent. The capex focus will be continue to be specifically on roads, railways, housing, and rural/urban infrastructure. Even as Centre may further extend capex incentives to states, the capacity for states to spend may be nearing its limits.

Capex/Revex mix will further improve. Revex/GDP will also ease to 11.2 percent vs 12.0 percent in FY24 and focus will likely be on welfare, rural, and MSMEs. The major subsidy burden may hug Rs 4 lakh crore, with extension of the free food scheme to be offset by mild declines in fertilisers and oil subsidy outlays.

Tax buoyancy to lose vigor but tax base stays strong; non-tax revenue stream to ease

We expect gross tax/GDP ratio to stay steady at 11.4 percent after a robust tax buoyancy in FY24 across segments. India's fiscal profile has become structurally healthy, amid better tax compliance, and resilience in domestic growth. We do not expect any major announcements for tax mobilisation and rationalisation, however some tinkering around the new concessional tax regime may not be fully ruled out.

Separately, non-tax revenue would still be healthy led by RBI dividend amid consistent FX sales, but may fall short of last year’s bumper surplus. Regarding conventional divestment, the windfall gains may face pressure from stake sales of government's large holdings, which are mainly concentrated in commodity companies and utilities sector.

Net market borrowings elevated at Rs 11.5 lakh crore; Gross borrowing may range Rs 15.2 lakh crore

We expect FY25 net borrowing to be around Rs 11.5 lakh crore (Rs 11.8 lakh crore in FY24) - 65 percent of total fiscal funding versus 67.4 percent in FY24E. Heavy reliance on NSSF (more than 25 percent of GFD) will continue, as deposit rates have barely moved meaningfully in last one year.

Gross borrowing would be Rs 15.2 lakh crore, assuming (1) no switch or rollover takes place for G-sec papers redeeming in FY25, (2) no direct re-investment proceeds by the RBI in FY25 of its maturing G-sec bonds.

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