Budget 2025: Govt should accelerate divestment policy to unlock value from stake in listed CPSEs

Budget 2025

By Rajkumar Singhal, CEO at Quest Investment Advisors

As India gears up for the Union Budget 2025, a fine balance between fiscal prudence and growth stimulus becomes paramount. In a global context marked by geopolitical uncertainties and domestic challenges like moderating GDP growth and uneven sectoral performances, this budget presents an opportunity to chart a resilient and forward-looking economic path.

The Budget is expected to pronounce strategies to chart out the course by emphasizing three major themes -- infrastructure development, manufacturing and innovation, and technological advancement.

Significant capital expenditure is likely in sectors like roads, railways, ports, and urban infrastructure to ensure continuity. Initiatives like ‘Design in India, Design for the World’, which are aimed at boosting indigenous design capabilities, may attract more budgetary allocation. More fiscal support to startups, manufacturing, electronics and semiconductor production is widely expected given India’s efforts to cut import dependency.

However, there are challenges. Significant among them is fiscal deficit management. The government aims to bring the fiscal deficit to 4.5% of GDP by FY26, down from the 4.9% projected for FY25. With nominal GDP growth forecast at 10.5% for FY26, achieving this target requires disciplined expenditure and robust revenue growth. FY25 fiscal deficit was aided by direct tax buoyancy, strong personal income tax collections (+24% YoY till November 2024), and RBI’s dividend of Rs 2.1 trillion. However, weak corporate tax collections (-1% YoY) and subdued capex (46% of Budget Estimates-BE till November 2024) highlight a bumpy road ahead.

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When we examine the revenue side, personal income tax has consistently outperformed and it is expected to grow by 18% YoY in FY25 and 15% in FY26. Corporate tax collections are expected to recover with a 10% YoY growth in FY26. H1FY25 profit growth for BSE500 was 3.3%, and BSE200 Q3 profits are expected to grow 10% as per the Axis Capital report, but it appears that a slowing economy has put strain on smaller companies that contribute 45% to corporate tax.

GST collections are forecast to grow by 10%, aligned with nominal GDP growth. Customs and excise duties are expected to see modest increases of 8% and 2%, respectively. In the case of non-tax revenue, RBI dividends may normalize to around Rs 1.5 trillion in FY26, compared to FY25’s peak. Dividends from PSUs are expected to remain steady.

From the expenditure side, the government’s focus on capital expenditure as a growth driver remains crucial. While capex allocation rose by 17% in FY25 BE, actual spending lagged at 50% of BE till November 2024. We expect revised BE will show a modest 5% growth only. For FY26, a 15% YoY capex growth is anticipated.

In revenue expenditure, persistent burden of subsidies and interest payments limit flexibility. Interest cost, constituting 33% of total revenue expenditure, and subsidies at 11% leave little room for discretionary spending. Health and education remain underfunded at 0.3% and 0.5% of GDP, respectively. A targeted increase in these areas is imperative to drive long-term productivity.

Despite having an ambitious divestment target of Rs 50,000 crore for FY25, only 18% has achieved till November 2024. For FY26, a conservative estimate of Rs 40,000 crore billion can be set, but the government should accelerate its strategic divestment policy to unlock significant value from its Rs 40 trillion stake in listed CPSEs.

We expect the government to provide some incentives for MSMEs. This could be in the form of enhanced credit guarantee for lenders who support MSMEs. Supportive policies for farmers such as higher MSP could see higher allocation. In addition, we can expect renewed thrust on irrigation, agri-tech, and rural connectivity.