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Weaker political capital, uneven growth story with tepid consumption, and missing vigor in private capex and the rural sector form the backdrop of the upcoming Budget. A segment of the market expects slower pace of fiscal consolidation and changed policy priorities ahead, but we don’t see massive policy pivots. Though economic trade-offs stay challenging amid reducing fiscal impulse to growth, the policy spirit is unlikely to be derailed. The fiscal buffer from RBI’s excess dividend of 0.4% would be disproportionately directed toward allocation for the rural/farm/welfare sector, while capex may increase slightly. Ex-interest revex/GDP may rise to 7.7%, and capex/GDP may further pick up, to 3.5%. Gross tax/GDP is likely to be stable at 11.6%, despite the easing tax growth. Mild tinkering and sweeteners on personal taxes may not cost the exchequer >0.1% of GDP. Overall, we maintain FY25E GFD/GDP at 5.1%, after 5.6% in FY24P. Though net borrowing at Rs 11.4trn would be ~Rs300bn lower than the Interim, small savings are likely to fund 27.8% of GFD.

Budget to be a vital signaling tool – Policy choices unlikely to be materially changed

The upcoming Budget will still set the stage for policy choices ahead, and will be watched for pace of fiscal consolidation and policy priorities on capex and non-capex spend. The changing political landscape, uneven growth story, tepid private consumption (5Y CAGR: >4%), missing private capex, and unexciting rural space have led markets to expect a significant pivot in the Centre’s fiscal behavior. To be fair, the effective fiscal impulse has been significantly negative for growth over the years and both, the Centre and States, overachieved their FY24 fiscal targets. This reflects the overarching policy trade-offs between nurturing the growth recovery and diminishing fiscal space with challenging debt dynamics. But the Centre is unlikely to let go of the consolidation journey ahead, despite challenges of the political economy. The policy direction/prerogatives may remain largely similar, focusing on a credible and clearly communicated consolidation, anchored on stronger revenue mobilization and spending efficiency, even though spending proportion of revex may be higher than the Interim budget.

Steady consolidation – FY25E GFD/GDP to stay at 5.1% after a 0.8%pt tightening in FY24

Increased degree of freedom amid 1) RBI’s excess dividend bonanza of 0.4% of GDP, 2) rolled over Rs1.7trn cash balance from last year’s fiscal savings, and 3) better tax profile, etc would make the 0.5% consolidation path in FY25 easier and cushion against any revenue slippages. The extra resources would be used to increase welfare/rural spending – a segment that has borne the maximum brunt of past consolidations (down 4.5% of GDP from the Covid highs). Possible income-tax cuts for the lower strata may also be tried, but expenditure multipliers tend to be higher than tax multipliers; thus the policy bias may be more toward rural spending, wherein marginal propensity to consume is higher. Interestingly, the capex outturn may not suffer at all and could even see a mild increase across key categories. The medium-term growth multipliers associated with quality of spending and capex spend will keep the policy focussed on capacity creation.

FY25E capex/GDP ratio to rise further to 3.5%; revex focus on rural, welfare spending

Centre’s capex/GDP is likely to rise to 3.5%, i.e. 1.7%pts higher than pre-pandemic ratio, with capex growth at ~20%, implying that rest of FY25 may see 35%+ growth. The capex focus would remain on roads, railways, housing, rural/urban infra, and capex incentives to states. Revex (ex-interest payment)/GDP will rise to 7.7% vs 7.5% in interim FY24BE, and focus is likely to be on welfare, rural, interest subsidy on housing loans, and MSMEs. We hope to see higher allocation toward health and education as well for better human capital ahead. Capex/revex ratio may not materially change.

Tax/GDP to be steady, with tax base being strong; RBI leads the non-tax revenue stream

We expect gross tax/GDP ratio to be steady at 11.6% after a robust tax buoyancy in FY24. Admittedly, India's fiscal profile has become structurally healthy, amid better tax compliance. We do not expect any major announcements for tax mobilization, but are not ruling out some sweeteners in personal tax rates for lower income strata. Divestment remains a tricky subject, but we don’t see the Centre cutting the target from the Interim budget.

Net market borrowings to mildly ease to Rs11.4trn; net T-bill issuance may be close to nil

We expect FY25 net borrowing at ~Rs11.4trn (Rs11.8trn in interim FY254BE) – 68% of the total fiscal funding, akin to FY24. Heavy reliance on NSSF (<27% of GFD) will continue, whereas roll-over of excess cash surplus is likely to help reduce net short-term borrowing (as already seen in 1QFY25). A mild cut of Rs300bn in dated borrowings is likely happen only in 2HFY25.

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