Target 5.1% fiscal deficit for FY25 a big positive, no tinkering with tax structure seen in full budget

Government unlikely to tinker with tax structure in full budget

By Indranil Pan, Chief Economist at YES Bank

As was expected, the Interim Budget is devoid of any policy announcements. However, it has ticked off the right boxes so far as the policy intentions of the government of the future are concerned and has also taken consolidation seriously by targeting for a 5.1 percent GFD/GDP in FY25. This is just an interim step towards the 4.5 percent FD/GDP for FY26 which the Finance Minister appear to be confident of achieving. The present government’s fundamental goal of policy making – to achieve inclusive growth and development remains intact.

Indeed, in her speech, the FM laid stress on how the policies of the government have been targeted to address “systemic inequalities” in the system. The Poor, Women, Youth and Farmers continue to remain in focus. The efforts of the government with regards to boosting farmers’ incomes will be stepped up. The government indicated that the focus is on the outcomes and not on outlays with an aspiration towards achieving socio-economic transformation.

Also read: FM: Growth robust; reforms yielding results, inflation manageable; open for SBI, ONGC disinvestment

We had been indicating that with the current macro conditions, especially with real GDP growth anticipated at 7.3 percent for FY24 after a 7.2 percent in FY23, there would possibly not be any requirement for a Keynesian push. And this Budget does not take this route as there have been no changes that have been announced to the tax side. Thus, the central government has not walked down the populism route in the run-up to the Union budget. We even remain confident that the full Budget that will be announced around June 2024, the government would not want to tinker with the tax structure further and continue to focus on compliance for generation of resources.

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Indranil Pan

Chief Economist|YES Bank

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Notably, one big support to the economy during Covid and even after has been the government’s thrust on capital expenditures. And this budget has maintained the focus on capacity building through investments. While revenue expenditures are up by a mere 3.2 percent, on-budget capital expenditure budget has expanded 16.9 percent. Capital expenditures are now at 3.4 percent of GDP for FY25, compared to 3.2 percent of GDP in FY24. Consequently, share of revenue expenditure in GDP is down to 11.2 percent in FY25, compared to 11.9 percent in FY24.

Also read: Nirmala Sitharaman terms Interim Budget 2024 'secularism in action'

And, capex/revenue expenditure ratio has further improved to 30 percent for FY25, compared to 27 percent in FY24 – a significant positive. Important to note that the government has curtailed its budget allocations towards subsidies – specifically fertilizer subsidies. Global oil prices have proved to be volatile and given the current geopolitical skirmishes, crude oil prices have refused to move lower. In the final analysis, the government may be seen to overstep on the fertilizer subsidies.

On the capital expenditure side, the focus continues to be on roads and railways, that corners around 50 percent of the capex budget. For the railways, projects have been identified under the PM Gati Shakti and aims at improving logistics efficiency and reducing costs. This is of utmost importance, given that logistics costs remain high in India, thereby restricting the competitive edge for Indian manufacturers, even as the government has long moved ahead and had reduced the corporate tax rates to ASEAN standards. The other point of highlight in the capex budget is that earmarked for defence – share of capex to this segment has now drastically reduced to 16 percent compared to around 32 percent in FY22.

The big positive surprise in this Budget is to target a 5.1 percent GFD/GDP for FY25. Other important fiscal metrics, such as, primary deficit and revenue deficit are also seen to improve significantly in FY25 to 1.5 percent (2.3 percent in FY24) and 2.0 percent (2.8 percent in FY24) respectively. This has enabled the government to restrict its gross borrowing number to Rs 14.13 lakh crore for FY25, compared to Rs 15.43 lakh crore in FY24.

The comfort on the supply side is also to be seen against a likely comfort from the demand side due to the inclusion of India in the JPM Bond Index. This led to a large 10 bps rally in the India G-sec 10-year benchmark yield, that closed the day at 7.06 percent and is likely to go lower to around 6.75 percent as the RBI also starts its policy rate cutting cycle sometime in FY25.

Effectively, given that the risk-free yields are likely to be lower in FY25 compared to FY24, the borrowing costs of the corporates are also likely to come off. The hope here is that the private sector should again take up the mantle of capex, thereby closing the virtuous cycle and lead India to a faster and sustainable growth in the coming years.

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