Union Budget 2024-25 to balance investment and consumption

The Budget is expected find a balance between supporting investment and consumption.

With the Union Budget for FY2025 just a week away, anticipation has built up around the changes that is would bring about. While expectations are rife, we believe that the Government of India (GoI) will likely avoid major changes from what was penciled into the Interim Budget that had been presented prior to the Parliamentary Elections. Nevertheless, the Budget is expected to provide support to the productive sectors of the economy, by finding a fine balance between supporting investment and consumption.

Indian macros are undoubtedly looking healthy, which finds a mirror in the performance of our rated portfolio as well. For instance, in FY2024, ratings of 330 entities were upgraded and 156 ratings were downgraded, resulting in a credit ratio of 2.1x. In 3M FY2025, ratings of a further 62 entities were upgraded while those of 39 entities were downgraded, with the credit ratio remaining quite healthy at 1.6x.

One of the factors that has underpinned the sustenance of the post-Covid economic growth momentum has been government capital spending. In our view, the government must continue to support infrastructure creation via the budget. In this regard, we believe that the hikes in the budgeted capex of the Ministry of Road Transport and Highways and the Ministry of Railways were quite lacklustre, at just 2-6%, in the Interim Budget. These should be raised to double digits, by redistributing the Rs 700 billion that were earmarked for ‘new schemes’ under the Finance Ministry. This would enable a higher spending on infrastructure, without impacting the government’s aggregate capex number of Rs 11.1 trillion for the fiscal.

On the other hand, the common refrain is that the private sector capex cycle appears underwhelming on the whole, which gives rise to the market expectation of relief in corporate income tax; in our assessment, the GoI is unlikely to bring in drastic changes on this front. There are signs of a pick-up, albeit uneven, in private capex, in a variety of sectors such as cement, steel, automobiles, aviation, hotels, data centers etc.

Further, there is a convergence of conditions that are necessary, although clearly not sufficient, for a kick-off of a multi-year private capex cycle. These include elevated capacity utilisation levels, sizeable profits over the last couple of years, and cleaner corporate and bank balance sheets. Moreover, the policy interest rates have been stable for some time. While the timing is not as yet crystal clear, the next policy action is expected to be a cut, kicking off a shallow rate cut cycle. As a result, any major changes in corporate taxes that lower hard-won revenue gains, would be counterproductive to the fiscal health.

Instead, the Budget could focus on measures that boost demand to help support the capex cycle. For instance, urban consumption has been rather uneven over the recent quarters, with the low- and middle-income households bearing the brunt of high food inflation. A relief on personal income taxes, either by the way of raising minimum thresholds for paying taxes or via exemptions, would boost consumption, particularly at the non-premium end of goods and services. The revenue foregone needs to be carefully calibrated however, especially to make sure that not too many taxpayers fall out of the tax net.

On the rural front, a consumption boost can be attempted by raising expenditures on rural-focused schemes vis-à-vis the Interim Budget, with the help of the additional headroom on the revenue side. This would play an important role in providing some support to the rural demand, which was impacted by an inadequate and uneven monsoon in the previous fiscal.

The government must also take cognizance of sector-specific issues, such as the high GST rate of 28% prevailing on cement. Bringing this down to a lower tax bracket, would make homes more affordable and could extend the revival that is currently being witnessed in the residential real estate market. This would also reduce construction costs for infrastructure projects. While this is outside the purview of the Union Budget and is relevant for the GST Council, any signal to this end would be eagerly watched.

Among the key asks for the financial sector, ICRA believes that some of the PSU general insurance entities would need further support from the GoI via fresh capital infusion. With PSU banks in good health, capital infusion into this sector appears unlikely. Additionally, the government must also take steps to promote the corporate bond market to provide long term funding for the infrastructure and financial sectors. Further, removal of the anomaly on the taxation of debt mutual funds vs. equity mutual funds is awaited, to bring in parity across different asset classes viz real estate, debt and equity. Even taxation of bank deposits will require recalibration vs debt mutual funds.

The GoI is expected to provide a medium-term fiscal consolidation roadmap beyond FY2026 in the upcoming budget. While a gradual cut in the fiscal deficit target would be appreciated over the medium term, it must emphasize that this will not come at the cost of capex. In fact, we believe that the new medium-term target must be adjusted to account for the ‘on-budgeting’ of off-budget capex that has taken place over the last couple of years. This would ensure that budgetary support to infrastructure creation continues over the medium term.