Nomura's Sonal Varma says FY25 Budget 'not a pre-election budget'

For Varma, Nomura’s chief economist for India and Asia ex-Japan, the assumptions underpinning the 2024-25 budget are “reasonable”.

The 2024-25 Budget was not a pre-election one according to Sonal Varma, Nomura's chief economist for India and Asia ex-Japan.

"This was not a pre-election budget. While the budget speech talked a lot about the key voter constituents, it has chosen to prioritise fiscal consolidation," Varma said on February 1 following Finance Minister Nirmala Sitharaman's speech in Parliament.

"This bodes well for macro stability and will be seen as positive by the RBI as well," Varma added.

Delivering what Varma called was a "positive surprise", Sitharaman announced next year's fiscal deficit target at 5.1 percent of GDP – lower than Nomura's as well as the consensus prediction of 5.3 percent.

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"We continue on the path of fiscal consolidation, as announced in my Budget Speech for 2021-22, to reduce fiscal deficit below 4.5 percent by 2025-26," the finance minister said, adding that the fiscal deficit for 2023-24 had been revised down to 5.8 percent.

Like the fiscal deficit target, the Centre's borrowing are "much lower than expected", Varma said. At Rs 14.13 lakh crore, the government's gross market borrowing figure for 2024-25 is sharply lower than economists' expectations of Rs 15.2 lakh crore. This sent prices of government bonds soaring in the secondary market.

"This makes the demand-supply dynamics even better," Varma said.

India's sovereign debt is set to be included in JPMorgan's global indices starting June and could also become a part of Bloomberg's indices starting September. As such, demand for government bonds will likely exceed their supply and should push bond yields – which are the government's cost of borrowing – lower next year despite liquidity conditions tightening sharply.

On capital expenditure, Varma said the target of Rs 11.11 lakh crore – 11.1 percent higher from the 2023-24 Budget estimate and 16.9 percent higher than the revised estimate – raises the capex-to-GDP ratio to 3.4 percent from 3.2 percent this year even though the pace of growth has expectedly come down.

"Over the last 2-3 years, private capex was weak, so public capex stepped in. Now with private capex likely to pick up, the government is slowly stepping back to prevent crowding out," the economist said.

On the whole, the assumptions underpinning the Budget numbers are seen as "reasonable", with the nominal GDP budgeted to increase by 10.5 percent next year.

"There will be some hits and misses, but seems achievable overall," Varma said.