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Government stays focused on long-term macro stability

Committed to achieving fiscal deficit of 4.5% of GDP by FY26 The Interim Union Budget 2024 was presented on 1st Feb’24. Although the Finance Minister had already informed that no “spectacular announcements” were forthcoming, the market participants had some expectations. However, the government did not announce any new schemes or incentives and followed the fiscal deficit consolidation path by maintaining its investment-led spending growth strategy.

Fiscal deficit budgeted at 5.1% of GDP in FY25BE, reduced to 5.8% of GDP in FY24RE: In stark contrast to the market expectations of 5.3-5.4% of GDP (and our forecast of 5.2% of GDP), the Government of India (GoI) has budgeted a fiscal deficit of 5.1% of GDP for FY25, implying a consolidation of 70 basis points (bp) next year. Moreover, the GoI has also lowered its deficit target for FY24 to 5.8% of GDP, notwithstanding the fact that the nominal GDP growth estimate for FY24 was also revised down. Therefore, the fiscal deficit for FY24 is revised down to INR17.35t from the target of INR17.87t. For FY25, the fiscal deficit is budgeted at INR16.8t. Total liabilities of the GoI are likely to ease to 56% of GDP in FY25BE from 56.9% of GDP in FY24RE, owing to lower national small saving funds (NSSF). The GoI has budgeted gross market borrowings (GMBs) at INR14.1t in FY25BE vs. INR15.4t in FY24RE, and net market borrowings (NMBs) and NSSF are kept unchanged at INR11.8t and INR4.7t, respectively.

Tax receipts could surpass the budgeted growth of 12.5%/11.5% YoY in FY24RE/FY25BE: The GoI has raised its FY24 gross tax receipt forecasts by INR760b to INR34.4t. However, due to higher devolution and lower divestments, total receipts are raised by only INR400b. The GoI has budgeted 11.5% growth in gross taxes for FY25, with total receipts growing by 11.8%. As highlighted in our Budget preview, we believe that gross taxes could be higher due to corporate income taxes. Therefore, while we expect gross taxes and receipt growth for FY25 at ~12% (similar to FY25BE), we believe that total receipts could come in at INR31.3t, about INR500b higher than FY25BE. Further, the GoI has halved its divestment receipts to INR300b in FY24 and budgeted it at INR500b for FY25 (in line with our forecasts).

GoI continues to focus on better spending quality: At a time when there were high expectations to announce measures to support the rural sector, the GoI kept revenue expenditure growth at just 3.2% YoY, and propelled capital expenditure (capex) strongly for the fifth consecutive year. Excluding interest payment subsidies, revenue expenditure is budgeted to grow 5.7% YoY in FY25, marking the slowest growth in 12 years. The GoI’s capital spending, however, is budgeted to grow 16.9% YoY in FY25BE (due to downward revision in FY24), following an average of 30% YoY during FY21-FY24RE. Since the GoI’s total expenditure is budgeted to grow just 6.1% in FY25BE, the share of capital spending is budgeted to rise to 23.3% of total spending, marking the highest share in the past three decades.

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