By Nilesh Shah, Managing Director of Kotak Mahindra AMC
Budget 2024 signals a strong commitment to India's macroeconomic story. It sets the fiscal deficit target for FY25 at 4.9 percent of GDP, lower than market expectations. In absolute terms, this amounts to Rs 16.15 lakh crore. For FY26, it aims to bring the deficit below 4.5 percent. These targets look credible.
The budget keeps the nominal GDP growth rate at 10.5 percent, same as was projected in February 2024. This is a realistic assumption, despite an 8 percent real growth in the second half of FY24 and RBI's FY25 growth projections at 7.2 percent. Extra revenues from RBI have been prudently used by increasing total expenditure only by ~ Rs 50,000 crore, while keeping capital expenditure constant and the balance being utilised in reducing the fiscal deficit. As the bulk of the increase in expenditure outlay is in the form of asset creation (houses/ roads etc), the budget is non-inflationary and would provide comfort to RBI on the inflation front.
We believe the actual fiscal deficit for FY25 could be lower due to higher tax collection on account of tax buoyancy. For FY26, the government needs to curtail its fiscal deficit by about Rs 30,000 crore -40,000 crore to ensure it's below 4.5 percent. This is achievable through better tax compliance or increased non-tax revenue and disinvestments.
Also read: FM Sitharaman stands firm on fiscal discipline; RBI dividends help in juggling post-poll necessities
The budget's priorities are clear. It focuses on economic growth drivers. Special attention is given to empowering women, youth, employment, and skill development. A sum of Rs 1.48 lakh crore is allocated for these. There are new ideas too, like internships with top 500 companies. This shows a push for self-reliance over handouts.
After a long time, we see some tax changes. Standard deduction for salaried people is up. Import duty on gold and silver is down. LTCG (Long-Term Capital Gains), STCG (Short-Term Capital Gains) tax rates for equities have increased. Revenue estimates are conservative.
Given higher returns on its dollar investment, the RBI is likely to give a higher dividend next year too. Even accounting for additional spending, the government may have a Rs 20,000 crore-30,000 crore surplus left to reduce the FY26 deficit. If the actual fiscal deficit for FY25 is lower than 4.9 percent, then achieving 4.5 percent or even lower in FY26 would be simpler.
Also read: What Budget 2024 means for India Inc.
The Finance Minister's approach is like an all-rounder in cricket. It steers the economy towards a possible sovereign rating upgrade, much like winning a championship. The budget's fiscal consolidation path looks achievable. It balances growth needs with fiscal prudence. The conservative estimates and focus on asset creation provide a solid foundation. If executed well, India could see improved fiscal health and a high chance of a sovereign rating upgrade in future.
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