New Delhi. With the upcoming Union Budget for 2024-25 set to be an interim one for the purpose of a vote-on-account, major policy changes and announcements are unlikely. However, the expansion in the Government of India’s (GoI’s) capex and the extent of fiscal consolidation would be scrutinised closely, given the implications for growth and G-sec yields, respectively. ICRA expects the fiscal deficit target for FY2025 to be set at 5.3% of GDP, midway through the expected print of 6.0% for FY2024 and the medium-term target of sub-4.5% by FY2026. This, along with our projection of an appreciable dip in the revenue deficit, would allow for a capex target of Rs. 10.2 trillion for FY 2025, 10% higher than the expected level for FY2024 vis-Ã -vis the 20%-plus YoY expansion seen during FY2021-FY2024. A higher capex target would impinge on the GoI’s ability to bridge half the required fiscal consolidation in FY2025, thereby making the task of reaching medium-term fiscal deficit target by FY2026 even more challenging.
ICRA’s expectations for FY2024:
· ICRA expects the GoI’s revenue receipts to exceed the FY2024 Budget Estimate (BE) by ~Rs. 0.5 trillion, largely driven by the overshooting in net tax (by +Rs. 0.3 trillion vs. BE; led by direct taxes) and non-tax (by +Rs. 0.2 trillion; owing to higher-than-budgeted dividend surplus transfer by the RBI) revenues. On the expenditure side, ICRA estimates the total spending to remain largely in line with the FY2024 BE of Rs. 45.0 trillion, with a lower-than budgeted capital expenditure (by -Rs. 750 billion vs. BE) partially offsetting the projected overshooting in revenue expenditure (by +Rs. 800 billion) vis-Ã -vis the budgeted target for the fiscal.
· Fiscal deficit unlikely to overshoot the FY2024 BE of Rs. 17.9 trillion. However, a lower nominal GDP number than what the Union Budget had pencilled in (NSO’s first advance estimates: Rs. 296.6 trillion vs. FY2024 BE: Rs. 301.8 trillion), is likely to result in the fiscal deficit printing at 6.0% of GDP (FY2024 BE: 5.9% of GDP). This, along with the robust inflows into small savings schemes, suggest that the GoI’s market borrowings are likely to remain in line with the budgeted amount for FY2024 (gross: Rs. 15.4 trillion; net: Rs. 11.8 trillion).
ICRA’s expectations for FY2025:
· Given the favourable macroeconomic backdrop and expectations of the benign domestic environment sustaining in the next fiscal, ICRA expects the GoI to continue on the fiscal consolidation path in the Union Budget for FY2025. However, this is likely to entail a slower expansion in capex vis-Ã -vis that seen in the post-Covid years, which could weigh on the growth in economic activity. Additionally, with the upcoming Budget set to be an interim one for the purpose of a vote-on-account, major policy changes and announcements are unlikely at this juncture.
· We expect the GoI’s gross tax revenues (GTR) to grow by a healthy 11% in FY2025, led by direct taxes and GST collections, even as the growth in excise and customs duty collections is likely to be subdued. With ICRA’s nominal GDP growth forecast of 9.5%, tax buoyancy is assumed at a healthy 1.2 in FY2025 (against 1.4 expected for FY2024), in line with the historical average seen during FY 2015-19.
· The disinvestment target is likely to be pegged at sub-Rs. 500 billion for FY2025. Given the uncertainties involved in market transactions, it would be prudent to set a moderate target of sub-Rs. 500 billion for FY2025, instead of a higher aim that may disrupt the budget math if there is a large shortfall in such receipts by the end of the fiscal, based on the past year trends.
· ICRA expects the revenue expenditure to increase by a modest ~4% in FY2025 (albeit over the somewhat higher than-budgeted number expected for FY2024), led by a moderate growth in interest payments amid a slight moderation in allocation for subsidies and a continued focus on curtailment of other expenses. We estimate the GoI to budget for a capex of Rs. 10.2 trillion in FY2025, implying a relatively sedate YoY expansion of ~10%, compared to over 20% expansion seen in each of post-Covid years. The slowdown in capex growth is likely to have some bearing on economic activity and GDP growth.
· ICRA expects the GoI to target a fiscal deficit of 5.3% of GDP in FY2025, midway through the expected print of 6.0% in FY2024 and the medium-term target of 4.5% for FY2026. This would entail an absolute fiscal deficit of Rs. 17.1 trillion in FY2025, a welcome decline from the Rs. 17.9 trillion budgeted by the GoI and expected by us for FY2024. We believe that a higher amount of capex vis-Ã -vis our expectation of Rs. 10.2 trillion for FY2025 would impinge on the GoI’s ability to bridge half the required consolidation in the coming fiscal, thereby making the task of attaining the medium-term target set for FY2026 even more challenging. As per ICRA’s estimates, every 10 bps of expansion in the fiscal deficit-to-GDP ratio would allow for an additional capex of ~Rs. 324 billion.
· For FY2025, the 15th Finance Commission (FC) had recommended a normal borrowing limit of 3.0% of the Gross State Domestic Product (GSDP) for the state governments. Given this and ICRA’s expectations of the GoI’s fiscal deficit, the General Government deficit is likely to dip to 8.3% of GDP in FY2025 from 9.2% of GDP expected in FY2024. This would be the lowest level of the General Government deficit since FY2020 (7.2% of GDP).
· Net General Government dated market borrowings for FY2025 are pegged to rise to Rs. 18.6 trillion, marginally higher than the Rs. 18.5 trillion projected for FY2024. With larger redemptions of G-sec and SGS, gross borrowings are estimated to rise by 2.1% to Rs. 25.5 trillion in FY2025 from the projected Rs. 25.0 trillion in FY2024. Overall, largely stable market borrowings, along with inflows on account of bond index inclusion, are expected to augur well for yields.
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