The first budget of Modi 3.0 will be tabled on July 23 and brokerage firm Nomura expects the government to cut its FY25 fiscal deficit target while sticking to policy continuity and fiscal consolidation, despite its weaker mandate.
Nomura predicts the government to lower its FY25 fiscal deficit target to 5 percent of the GDP, down from the 5.1 percent announced in the interim budget. "Despite the increased financial demands of the two key allies (estimated to be around 0.2 percent of GDP in FY25), we expect the government to use the space afforded by higher RBI dividend (~0.4 percent of GDP) and lower FY24 fiscal deficit (~0.2 percent of GDP)," Nomura stated.
The latest data for FY24 indicates that the fiscal deficit was lower than expected, coming in at 5.6 percent of GDP compared to the revised estimate of 5.8 percent. This slight improvement of approximately 0.2 percent of GDP is mainly attributed to higher indirect tax revenues and lower spending on revenue, which balanced out a shortfall in direct taxes. This reduction in the fiscal deficit for FY24, according to Nomura, provides a more favorable starting point for setting the fiscal deficit target for FY25.
On the contrary, the brokerage does not foresee a decrease in market borrowing despite the possible cut to the fiscal deficit.
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Key themes of the upcoming budget, as identified by Nomura would be lifting consumption, social sector focus, manufacturing boost, infrastructure push (with central government capex at 3.5 percent of GDP, up from 3.4 percent in the interim budget) and its medium-term economic vision (reform agenda and fiscal glide path).
Regarding taxes, Nomura anticipates that the government to adhere to the tax revenue growth forecasts outlined in the interim budget, despite the preliminary data for FY24. However, the firm has factored in a lower growth rate for income tax collections, in anticipation of potential tax relief measures for middle-income households.
Since this will be the first post-election budget for the government, it will also stage is set for Modi 3.0 to present its medium-term economic vision and the reform agenda, aimed to take India towards becoming a developed economy by 2047. All focus remains on the Modi government and how it manages to uphold its economic targets for the country while bearing the burden of demands from coalition partners.
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