Full Budget may see quicker fiscal consolidation, higher capex if BJP wins big

Finance Minister Nirmala Sitharaman

A majority of exit polls see a resounding victory for the National Democratic Alliance (NDA) and a third term for Prime Minister Narendra Modi. On average, pollsters predict at least a 350-seats-plus victory for the Bharatiya Janata Party (BJP) and its allies.

The BJP alone had won 303 seats in the 17th Lok Sabha in 2019, securing a bigger mandate than it had in 2014.

If the BJP emerges as strong as the exit polls suggest, the full budget may not only mirror the interim annual financial statement but better the bets laid on fiscal prudence to spur foreign flows as well as on higher capital expenditure to boost domestic investments.

According to Madhavi Arora, lead economist at research and wealth management firm Emkay Global, "Once the election event risk is over, all eyes would be on the budget in July, which could continue with the consolidation process while improving the budget internals."

Arora expects the reform-driven targeted expenditure agenda to continue from a policy standpoint, while a healthy macro balance sheet of all economic agents augurs well for a higher trend growth path for the Indian economy.

The country's GDP growth for FY24 is expected to be an impressive 8.2 percent, while for the ongoing financial year, some see it being as high as 7 percent.

Taking into account trends from the exit polls, a Modi-led government may start its third term with continued focus on capital expenditure and accelerated fiscal consolidation, as was seen in the interim budget. That seems more of a given considering the bumper dividend from the central bank of Rs 2.11 lakh crore, which gives the finance ministry more leeway to continue on its current path.

Economists see the higher-than-budgeted dividend by the Reserve Bank of India (RBI) for FY24 helping the Centre curtail the fiscal deficit by 0.2 to 0.4 percentage points in FY25.

Some others see a potential BJP-led government at the Centre partially using the RBI bonanza for revenue expenditure and infrastructure spending, without altering the fiscal deficit target.

This means that there could be quicker fiscal consolidation and higher capital expenditure outlays.

At 5.6 percent, India's fiscal deficit for the previous financial year ended March 31 was already lower than its full-year target of 5.8 percent of GDP thanks to a small cut in expenditure.

This is after the Centre in the interim budget presented on February 1 not only revised lower its fiscal deficit target estimate for FY24 to 5.8 percent of the GDP from 5.9 percent earlier. At the time, the target for the current financial year was also cut by a huge 70 basis points to 5.1 percent.

Finance Minister Nirmala Sitharaman has time and again stated the government’s intention to reach a fiscal deficit below 4.5 percent by 2025-26.

A comfortable mandate to the BJP in the election to the 18th Lok Sabha has, therefore, triggered expectations of a continuation of or rather a hastening in fiscal consolidation.

If the NDA secures a comfortable majority, "policies will focus on encouraging macroeconomic growth to keep India on track to become the third largest contributor to global GDP by 2030. Fiscal prudence would continue with the stated goal of lowering the central government’s fiscal deficit to 4.5 percent of the GDP by fiscal year 2025–26", S&P Global Market Intelligence said in a report on May 27.

As mentioned above, another potential outcome if the BJP gets an absolute majority, is continued focus on capital expenditure.

According to Kotak Institutional Equities, the Centre's agenda is likely to focus on investment-led growth, with the recent large transfer of the RBI surplus enabling it to increase capex versus the interim budget. Kotak analysts added that the government has already executed the bulk of the required reforms for incentivising private investments.

In 2023-24, the Centre met 99 percent of its revised capex target of Rs 9.48 lakh crore.

Since the pandemic, the Centre has been focusing on boosting expenditure on infrastructure in a bid to improve the quality of public spending. In fact, the push towards capex is expected to continue in FY25 with the government allocating Rs 11.1 lakh crore. This is an increase of 11.1 percent from the FY24 budget estimate, and 16.9 percent higher than the revised estimate.

Beyond fiscal prudence and capex, a potential Modi-led government that has an absolute majority is also expected to stay focused on strategic sectors, in line with its stated post-election ambition of attaining a $30-trillion ‘Viksit Bharat by 2047’ by betting on private capex picking up as well as on measures to consolidate foreign investments.

"While sectoral foreign direct investment (FDI) limits are unlikely to be raised, project-specific ad hoc exemptions will become more likely, with the government encouraging the role of “national champion” firms in strategic sectors. Government efforts to accelerate private investment will continue, as indicated by past government policy shifts that sought to make increased private-sector capital formation a driver for overall fiscal improvement (as indicated by the interim fiscal year 2024 budget presented in February)," S&P Global Market Intelligence added.

The current regime had already been working on an agenda for the first 100 days if it were to be re-elected in June, focusing on areas such as the rural and agricultural sectors; infrastructure; resources; social vision; welfare; finance and economy; commerce and industry; technology; governance; and security and foreign affairs.

The 100-day agenda is said to focus on several key measures ranging from speeding up talks to clinch trade pacts with key economies such as Britain to setting up about 10 new cities to expand manufacturing and services sectors with an initial funding of about Rs 10,000 crore ($1.2 billion).

In fact, a day after most exit polls predicting a thumping majority for the NDA, Modi on June 2 held a bunch of meetings that had on their agenda matters ranging from reviewing the heat wave situation in the country to taking another look at the 100-day programme roadmap.

Another buzzing topic during the Lok Sabha elections has been potential changes to the capital gains structure and whether a possible BJP government would go for such a rejig.

To be sure, last month Sitharaman denied reports that the Income Tax (I-T) Department was planning to introduce changes in the capital gains tax structure in case the government was voted back to power.

A media report back in May had claimed that once the new government takes charge, the government may take steps to prevent tax base erosion, revamp laws on penalties, and impose uniform treatment for all asset classes. Currently, India follows a differential tax structure for various financial assets.

Weighing in on this speculation, Nirav Sheth, CEO, institutional equities at Emkay Global, on June 2 said that given that top leaders of the current government have almost advocated buying into equities even ahead of the election, they are unlikely to take a U-turn by making changes to the capital gains tax regime.

There is still some time left for the full budget, which is expected to be presented next month. But the direction offered by exit polls have already triggered sharp reactions in the markets, with the Sensex and Nifty opening at record highs on June 3, bond yields trending lower and the rupee surging.

Results for the 18th Lok Sabha polls will start trickling in on June 4. For now, one can only wait for the final outcome of the world's biggest election that went on for close to two months over seven intense phases.