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FY2025 union budget: Prudent and balanced

The FY2025 union budget delivered a prudent balance between capital expenditure, fiscal prudence and welfarism. The government continued with its focus on spending in core infrastructure areas, while expenditure on certain social welfare schemes was under control. The budget did minor tinkering on tax rates for individuals, while capital gains taxes were rationalized across asset classes.

Central GFD/GDP of 4.9% highlights sharper focus on consolidation

The government projected central GFD/GDP at 4.9%, in FY2025BE (Rs16.1 tn), compared to 5.1% in the interim budget, as it maintained its focus on improving the quality of the fiscal. We find the fiscal deficit targets realistic, driven by (1) 13% increase in direct taxes (12% increase in corporate tax and 14% increase in personal taxes), (2) 8% increase in indirect taxes and (3) upward revision of non-tax revenues (due to incremental Rs1.3 tn transfer of surplus by RBI). The government made minor changes to personal tax rates, while capital gains tax rates were partly rationalized across asset classes.

Expenditure under control as fiscal prudence remains the priority

The bulk of the increase in spending has been allocated to revenue expenditure (6% increase versus 5% in the interim budget) driven by targeted increase in (1) transfer to states, (2) job creation, (3) rural housing and (4) price stabilization. The government maintained its focus on capital expenditure, with a budgeted growth of 17% in FY2025BE to Rs11.1 tn (same as in interim budget). Key spends pertain to (1) roads and highways (Rs2.7 tn, same as interim budget), (2) railways (Rs2.5 tn, same as interim budget) and (3) loans for capex to states (Rs1.7 tn compared to Rs1.5 tn in interim budget).

Interest rates to continue their soft bias

We expect bond yields to remain soft in FY2025 led by (1) moderating domestic and global inflation and (2) favorable demand-supply dynamics for domestic SLR securities, led by firm FPI debt flows and long-end institutional demand. A dovish global monetary policy cycle and moderating domestic inflation (toward the 4% mark) will provide the RBI with the scope to embark on a shallow rate cut cycle. We expect the 10-year benchmark yield to be in the range of 6.70-7.1% in FY2025E.

Key sector highlights: Taxation impacts multiple sectors

The government’s sector-specific proposals largely pertain to (1) supporting rural and urban housing, (2) buybacks being taxed as dividends, (3) changes in capital gains taxation across multiple asset classes, (4) custom duty changes for multiples sectors, (5) higher outlay for clean energy, etc. At the same time, moderation in capex outlay is visible across the defense, fertilizers, railways, roads and urban infrastructure sectors.

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