Why Sitharaman's fiscal prudence will ease funds flow to private sector

Sitharaman also highlighted that the private sector has been allowed into the “core strategic” sectors and the government wants to have only “minimum presence” in these sectors.

Nirmala Sitharaman’s fiscal prudence in the Interim Budget 2024, where the finance minister laid down the government’s intent to bring down the fiscal deficit to 4.5 percent by 2026, augurs well for the debt market and corporates that depend on these markets to raise capital.

In her speech, the finance minister said that the revised estimate of the fiscal deficit is 5.8 percent of the GDP for FY24, improving on the budget estimate of 5.9 percent.

Read: Budget impact on debt funds: Fixed income managers may look to add duration to their funds

She added that the government will continue on the path of fiscal consolidation to reduce the fiscal deficit to below 4.5 percent by 2025-26. “The fiscal deficit in 2024-25 is estimated to be 5.1 percent of the GDP, adhering to that path.”

The government’s fiscal prudence, which will mean lower borrowing, will leave room for private sector borrowers, many of which struggle to access capital from traditional sources such as banks and are thus forced to seek alternative and expensive sources of capital.

“The fiscal deficit being pegged at 5.1 percent for FY25 is a positive move as it will help free up space for private borrowings as they pick up pace during the year, besides helping in containing inflationary pressures and supporting the bond market,” said Ranen Banerjee, partner and leader in Economic Advisory at PwC India.

Brokerage house Jefferies, in an analysis, said the interim budget is positive for interest rate-sensitive segments such as real estate, autos, PSU banks, NBFCs and small private banks.

The government's gross borrowing programme is likely to decline 8.5 percent on-year into next year, due to which 10-year yields declined by 12 basis points to 7.06 percent, the brokerage noted, adding that this increases the possibility of policy rate cuts by the Reserve Bank of India.

Madan Sabnavis, chief economist at Bank of Baroda, commented that the central government’s lower borrowing programme augurs well for the banking system. “There will be less pressure on the system for deployment of funds. Also given that more FPI will flow into G-secs, they (banks) can use their funds for financing credit,” he said.

Japanese brokerage Nomura added that the fiscal policy outlined in the budget will complement the RBI’s monetary policy with lower risk of inflation and less risk of the government crowding out the debt markets.

“From the RBI’s vantage point, the fiscal policy will likely be seen as complementing the monetary policy, due to its continued commitment to fiscal consolidation (lower inflation risk), quality of consolidation (more capex focus is a medium-term positive) and due to lower market borrowing (less risk of crowding out private borrowers),” the brokerage said.

“While the RBI’s MPC is likely to keep the repo rate unchanged on February 8, we expect first steps to address tight frictional liquidity and a more active discussion on removing the tightening bias in the policy guidance. In our base case, we expect 100bp of rate cuts, starting from August, with risks skewed towards earlier easing (in June),” it added.