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Budget Preview: 5.2% or 5.4% of GDP for FY25BE?

Expect the GoI to achieve fiscal deficit of 5.9% of GDP in FY24

* The Government of India (GoI) will present the Interim Budget 2024-25 on 1st Feb’24 (Thursday). Although the Budget presentation is only one part of managing public finances, it attracts significant attention. In this note, we discuss our expectations from the Interim Budget and present our fiscal math for FY24 and FY25.

* Based on provisional data available for 8MFY23 (Apr-Nov’23), our calculations suggest that gross taxes can exceed budget estimates (BEs) for the third consecutive year, by as much as INR1.3t in FY24. Due to higher non-tax revenue receipts, such as dividends, coupled with higher devolution to states and an expected shortfall in divestments, there is a projected over-achievement of INR1.1t in total receipts in FY24.

* According to the first supplementary demands presented on 6th Dec’23, the GoI has sought to authorize an additional cash outgo of INR584b in FY24, largely because of higher subsidies and defense services. Nevertheless, it is likely that total spending will exceed FY24BE by INR700-800b, led by higher NREGA spending. If so, the fiscal deficit will be INR17.6t in FY24, lower than the target of INR17.9t, but at 5.9% of GDP, as per the BEs (due to lower nominal GDP growth of 8.9% vs. BE of 10.5%).

* What about FY25BE? Notwithstanding the fact that 2024-25 Budget will be an interim budget, the most important thing to look out for would be if the fiscal deficit target will be kept at 5.2% or 5.4% of GDP (assuming 10.5% growth in nominal GDP). A target of 5.2% of GDP will give a real chance to achieve 4.5% in FY26, while 5.4% (or 5.3%) will almost surely postpone the target by at least one year (to FY27). It also means a difference of about INR900b or 2 percentage point (pp) of total spending next year.

* After an expected growth of 14% YoY in FY24 (which was 15% YoY as of Nov’23), we believe that gross tax receipts could grow 12.4% YoY in FY25. It is interesting to note that while the growth in indirect taxes is lagging the targets, direct taxes are expected to more than offset the shortfall in FY24. It means that we expect the tax buoyancy to ease to 1.2x next year, from an exceptional 1.6x in FY24.

* If so, total spending could grow anywhere between 6% and 8% to achieve a fiscal deficit target of 5.2%-5.4% of GDP, assuming nominal GDP growth of 10.5% in FY25. Since the economic growth is very strong, we feel that this is the best opportunity for the GoI to consolidate, and thus, recommend to target a fiscal deficit of 5.2% of GDP in FY25. This would mean a growth of 4.2% (2.8%/1.4%) in revenue spending, with 15% (20%/25%) growth in capital spending. More importantly, the primary spending growth will ease to 5.9%-6.7% YoY next year, the lowest in 12 years and compared to an expected growth of 14.5% YoY in FY24F.

* The upcoming general elections may lead to some populist schemes to be included in the Interim Budget 2024-25. In particular, we would be watching for any policies on these three areas (in order of probability): 1) it is widely known that the agricultural sector has been weak in the past few quarters. Therefore, any populist measures directed to the farm economy will be keenly watched. It may include the expansion of the PM KISAN scheme by as much as 50% to INR9,000 per annum or increased benefits in the form of insurance scheme or higher MGNREGA allocation (which is a demanddriven program); 2) since the cut in corporate income tax rate in Sep’19, there has been a continuous demand to reduce personal income tax rates as well. The new tax regime can be made more attractive by either increasing the exemption income limit, raising the income tax rebate under Section 87A or by reducing the highest surcharge rate; and 3) some incentives to further boost the residential or commercial property market.

* Overall, India’s economic growth has been much better than anticipated in CY23/FY24, and thus, there is no major need to provide support to consumption or investment spending. However, the upcoming general elections may warrant some announcements for the farm economy and the lower income class. At the same time, although tax receipts have been higher than targets for the last three years, the fiscal deficit needs to be narrowed further (and considerably) to avoid any crowding out, as and when the corporate investments pick up. We, therefore, hope that the GoI targets fiscal deficit of 5.2% of GDP in FY25, which will leave limited space to grow its spending.

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