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The upcoming interim budget would lack any big bang announcements but is likely to be watched for the pace of fiscal consolidation and policy priorities ahead.

While economic trade-offs stay challenging amid reducing fiscal impulse for growth, policy prerogatives and spirit will not get derailed, in our view. Although the risk of competitive populism has abated at the central level, we do expect a few relief measures for the rural/farm/welfare sector. That said, the capex/revex mix is likely to further improve, with capex/GDP projected at 3.3%. The gross tax/GDP ratio is set to stay steady at 11.4% despite easing tax growth. Overall, we project FY25E GFD/GDP at 5.4% after 5.9% in FY24E, implying net and gross borrowing at a stillsignificant Rs11.5trn and Rs15.2trn, respectively. While net borrowing would be 65% of fiscal funding, small savings are likely to fund 25% of the GFD (27% in FY24E).

Interim Budget a non-event, yet an important policy signaling tool

The upcoming budget, being interim in nature, is likely to be a non-event as far as big-bag announcements, new tax or spending pitches are concerned. However, it will still set the stage for policy choices ahead and will be watched for the pace of fiscal consolidation and policy priorities on capex and non-capex spending. We expect the policy direction and prerogatives to remain largely similar to that for the recent budgets, as the trade-offs remain between nurturing growth recovery and the diminishing fiscal space with challenging debt dynamics. Besides, the improving intersection of politics and economics implies that political capital is no longer as compromised around election cycles as perceived.

Steady consolidation ahead: FY25E GFD/GDP set to tighten to 5.4% vs 5.9% in FY24

Amid various push and pull factors, FY24 GFD/GDP could just about stay balanced at 5.9%, as budgeted. The positive buffers, such as: 1) robust tax collection, 2) super-normal RBI dividend, 3) mild capex cuts, 4) expenditure jig etc, would offset: i) higher payouts than budgeted on food, fertilizer subsidy, ii) the miss on ambitious divestment targets, and iii) the lower nominal GDP growth. For FY25E, we model steady consolidation of ~0.5-0.6% and see GFD/GDP at 5.4%. The scope of being too populist looks bleak, amid moderating tax revenue growth and high committed revex & heavy market borrowings and, of course, given the budget being interim. The asset sale print is likely to remain at sub-Rs500bn, while RBI dividend would be viewed closely. We assume 10.5% nominal GDP growth. A more aggressive nominal GDP assumption in the budget could make government balances look optically better.

FY25E capex/GDP to further rise to 3.3%; Revex focus on rural, welfare spending

Centre’s capex/GDP ratio is likely to rise to 3.3% – almost 1.6pts higher than the pre-pandemic ratio, even as capex growth may normalize to sub-15%. Capex focus will endure, specifically on roads, railways, housing, and rural/urban infra. The Centre may extend capex incentives to States, whose capacity to spend, though, may be nearing the limit. Capex/Revex mix will further improve. Revex/GDP may also ease, to 11.2% vs 12.0% in FY24E, and focus is likely to be on welfare, rural, and MSMEs. The major subsidy burden may hug ~Rs4trn levels, with extension of the free food scheme to be offset by mild dips in fertilizers and oil subsidy outlays.

Tax buoyancy to lose vigor, but tax base stays strong; non-tax rev. stream to ease

We expect gross tax/GDP to stay steady at 11.4% after a robust tax buoyancy in FY24 across segments. India's fiscal profile has become structurally healthy, amid better tax compliance, and resilience in domestic growth. We do not expect any major announcements for tax mobilization and rationalization, but some tinkering with the new concessional tax regime cannot be fully ruled out. Separately, non-tax revenue would still be healthy, led by RBI dividend amid consistent FX sales, but may fall short of last year’s bumper surplus. Regarding conventional divestment, the windfall gains may face pressure from stake sales of GoI’s large holdings, which are mainly concentrated in commodity companies and the utilities sector.

Net mkt borrowing elevated at Rs11.5trn; gross borrowing may trend at ~Rs15.2trn

We expect FY25E net borrowing at ~Rs11.5trn (Rs11.8trn in FY24), i.e. 65% of the total fiscal funding vs 67.4% in FY24E. Heavy reliance on NSSF (over 25% of GFD) will continue, as deposit rates have barely moved meaningfully in the last 1Y. Gross borrowing would be ~Rs15.2trn, assuming: i) no switch/rollover takes place for G-Sec papers redeeming in FY25; ii) no direct re-investment of proceeds from the maturing G-Sec bonds in FY25 by the RBI.

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