Budget expected to target fiscal consolidation, remain growth supportive

Interim Budget 2024: With the interim budget only weeks away, there are multiple expectations afloat. Some are expecting tax sops, some are expecting another push to economic growth. But what are the key things to watch out for in the upcoming budget? In an exclusive interview, Gaura Sen Gupta, India Economist, IDFC First Bank shared some insights with Republic Business. 

Edited Excerpts: 

Budget wishlist 

Given that this will be an interim budget, the focus will be on the fiscal metrics – fiscal deficit to GDP, capital expenditure target, g-sec issuance and nominal GDP growth. We expect the Union Budget to target both fiscal consolidation and remain growth-supportive. The fiscal deficit target for FY25 is expected at 5.4 per cent of GDP v/s 5.9 per cent deficit in FY24, led by strong growth in tax collections with nominal GDP growth expected to be higher and improved tax buoyancy. We expect moderation in capital expenditure growth in FY25 but it’s likely to remain on the stronger side at 10 per cent YoY. 

Government capital expenditure has been the key support of the recovery in the capex cycle post-Covid-19. Meanwhile, markets will be keenly watching for g-sec issuance figures on the funding side. Demand for g-secs will be strong in FY25 with India’s inclusion in the JP Morgan EM bond index and the rising prominence of long-only investors such as insurance, PFs and pensions.

Fiscal Deficit

We expect the government to meet the FY24 fiscal deficit target of 5.9 per cent of GDP, even after incorporating a slowdown in nominal GDP growth and disinvestment shortfall. Total receipts are expected to be around BE (budget estimate), with non-tax revenue exceeding the budget estimate led by RBI dividends and PSE dividends.  Gross tax revenues are expected to be at BE, with strong direct tax collections countering softness in indirect tax collection. Expenditure saving is expected on the revenue expenditure front. Some of the expenditure-saving avenues are likely to be lesser transfers to state governments for schemes, due to better expenditure tracking mechanisms and likely lower than BE interest expenditure.

Tax buoyancy

Direct tax collection growth has been stronger than expected, despite a slowdown in Nominal GDP growth in FY24, indicating improvement in tax buoyancy. We expect tax collection growth to remain robust in FY25 with improvement in nominal GDP growth and strong tax buoyancy persisting. That said, some moderation in direct tax collection is expected in FY25, with moderation in companies' profit growth and urban wage growth. Listed company profit growth in FY24 was aided by a reduction in input cost pressures. The incremental support from lower input costs to companies’ profit growth is likely to be lower in FY25. Indirect tax collections are expected to be better in FY25, with a pick-up in nominal GDP growth.

Capex momentum 

We expect some moderation in capex growth in FY25, as the Centre tries to balance the need for fiscal consolidation while remaining growth-supportive.  Capital expenditure growth is expected at 10 per cent YoY in FY25. Central government capital expenditure to GDP is expected to be 3.3 per cent , which is unchanged from the FY24 Union Budget.

Private capex cycle

There has been some pick-up in private capex indicated by improvement in fixed assets to total assets of listed companies in FY24. However, the government, both centre and states remain the key drivers of the capex cycle, with front-loading of capital expenditure.

On declining household Financial savings

The reduction in household net financial savings as per cent of GDP is not a worrying sign, as overall household savings have likely held-up. Household savings consist of physical and financial savings and it is likely physical savings have increased with pick up in real estate investment. Indeed, the rise in household borrowings has been led by higher housing loans. Another indicator that overall household savings have held-up is a reduction in the current account deficit in FY24. The current account is the gap between Savings and investments in the economy and in FY24 the current account deficit is estimated to narrow further to 1.5 per cent of GDP from a 2 per cent deficit in FY23.

On the rising household financial liability

The increase in household financial liabilities is expected as the formal sector expands and access to the banking sector rises. Compared to other countries, India’s household borrowings from the banking sector are moderate at 30.4 per cent of GDP. Moreover, within households, if you only consider individual borrowings from banks, the ratio is even lower at 24.9 per cent of GDP.

Missing targets

On the revenue front, we expect disinvestment proceeds to be less than the target of Rs 510 bn. To date, Rs 100.5 bn has been collected. Meanwhile, excise duty collections are expected to be lower than Budget Estimate with a reduction in tax on fuel exports (petrol, diesel and ATF exports) and a reduction in tax on indigenous crude oil production. Custom duty collections are also expected to undershoot Budget Estimate with a slowdown in imports.

Rural consumption

Rural consumption indicators have been mixed in FY24, reflecting the impact of uneven monsoon distribution. Labour market conditions in rural areas are also indicating some weakness with demand for employment under NREGA remaining higher than last year for the majority of FY24. For FY25, rural demand is expected to improve if the monsoon is normal and further normalization in labour market conditions. During the Covid-19 shock, there was reverse migration from urban to rural areas. While the majority of this has likely reversed by FY24, the rise in demand for employment under NREGA may indicate that labour market conditions have not yet fully normalized.  

Major reforms that will drive the growth of the economy

We expect the government to maintain focus on supporting the capex cycle with Central government capital expenditure at 3.3 per cent of GDP in FY25. Meanwhile, creating an environment which will support private sector capex will be key. This includes continued improvement in the ease of doing business and improved resource mobilisation. To enhance rural demand, greater allocation of budgetary resources to support the agriculture sector and rural employment creation.  

Roadblocks in boosting exports

The key headwind to exports in FY25 is likely to be a persistent weakness in global growth conditions. The impact of weaker external demand conditions as well as lower global commodity prices has resulted in a 6.5 per cent YoY decline in merchandise exports in FYTD24 (Apr-Nov). That said, India’s service sector exports have remained robust, rising by 6 per cent YoY in FYTD24 (Apr-Nov), led by software services and professional services. Growth conditions in the US have also held-up which would support software services exports. In FY25, US growth conditions are likely to weaken, and we could see some moderation in services export growth. Though service sector exports growth is likely to remain better than merchandise exports, reflecting the emergence of Global Capability Centres in India.