Union and Interim Budgets of FY25: Markets need to mind the gap

The most crucial takeaway from this Budget will be the Government’s outlook towards the committed fiscal deficit glide path.

By Debopam Chaudhuri 

The two general elections before 2024 were an indication that the NDA government does not rock the boat too much in an actual budget, that follows an interim one. Post the 2014 elections, NDA’s final budget raised the expenditure estimate by less than 2 percent, while the deficit estimate went up marginally by 0.5 percent (vs UPA’s interim budget estimates earlier during the year). In fact, after the 2019 elections, there was no change in estimates at all, between interim and actual budgets. Naturally, there is a buildup in market expectations regarding a similar pattern being repeated in 2024 as well, which have held benchmark bond yields at prevailing levels.

Expectations vs Reality

The 2024 electoral mandate could lead to some surprises. For the first time since 2014, the parliamentary seat share of the NDA alliance declined below 60 percent (62 percent in 2014, 65 percent in 2019 and 54 percent in 2024). Further, the BJP ceased to represent more than 50 percent of these seats in 2024. This brings us back to the active coalition years of the past, when managing a fine balance across political party lines sometimes took priority over what is best for the nation.

The problem is quite acute this time with the ruling party losing nearly 19 percent of the seat share in rural regions. Also, its vote share slipped significantly in major agrarian states like Haryana (vote share declined 12 percent vs 2019), Rajasthan (10 percent), Uttar Pradesh (8.6 percent), Karnataka (5.6 percent) and Bihar (3.6 percent). Consequently, it won’t be surprising if there is a rise in populist trends in the final Budget later this month, with higher allocation to welfare schemes focusing on the economically weaker population, women and rural India.

Likely Outcome

The most crucial takeaway from this Budget will be the Government’s outlook towards the committed fiscal deficit glide path. In my opinion, while any chances of preponing deficit targets have dimmed significantly, there should not be any alarms in meeting the existing goal of bringing the central fiscal deficit down to 4.5 percent of GDP by FY26.

The good news is that there is fiscal space available to accommodate a rise in revenue expenditure. Factors like higher RBI dividend, robust tax collections, especially GST, and a fiscal deficit of 5.6 percent (of GDP) in FY24 (better than estimated 5.8 percent) can generate an additional corpus of approximately Rs 3 lakh crores-Rs 3.5 lakh crores. Considering the government limits populist expenses to this, there should not be any downward revision in committed public capex plans. Hence, the fiscal math will remain intact, pacifying global credit rating agencies as well as domestic debt markets.

The Challenges

The assumption that revisions to revenue expenditure will remain restricted to Rs 3.5 lakh crores, is a big one. Budgetary spending on rural focused schemes have remained muted over the last 3 years, and the interim budget of FY25 was no different. Interim budgetary outlay in FY25 for the Ministry of Agriculture and Farmer Welfare was merely 0.6 percent higher than in FY24. Regarding schemes focusing on rural regions and economically weaker population, outlay for Food Subsidies contracted 22 percent in FY24 (y-o-y) and as per the interim budget, slated to contract another 3 percent in FY25. MNREGA allocations contracted 4 percent in FY24 and were not expected to grow in FY25 interim budget. PM Aawas Yojana (PMAY) has been on a declining trend since FY23. While the interim budget of FY25 expected a 49 percent rise in the scheme, this will be from a very low base. Similarly, PM KISAN scheme allocation shrunk 10 percent in FY23 and since FY24 there has been no change in allocation. A mere catchup to FY23 levels across some of these schemes could consume a large part of the Rs 3.5 Lakh crore surplus.

At the same time government inflows may weaken during the year. While higher urban economic activity was a major driver for buoyant GST inflows, another major factor was high inflation, which inflated tax receipts. As inflationary pressures weaken during the year, this nominal windfall may decline, lowering GST inflows. Similarly, economic activity, while being robust, could grow at a slower rate in FY25, than in FY24, owing to lagged impact of tight monetary policy environment. This will have a lowering impact on direct tax inflows as well.

Considering the upside risk on revenue expenditure and downside risk to revenue earnings, India’s fiscal management in FY25 will remain a tricky affair. A careful balancing act is necessary to uplift the economy while pacifying all stakeholders ranging from political alliances and oppositions, rating agencies, capital market participants and the Indian voters in upcoming state and other local elections.

Debopam Chaudhuri is a chief economist, Piramal Enterprises Ltd. 

Views are personal and do not represent the stand of this publication.