Finance Minister Nirmala Sitharaman will present Modi 3.0's first full year budget on Feb. 1, 2025.
Finance Minister Nirmala Sitharaman will present Modi 3.0's first full year budget on Feb. 1, 2025.
At a time when consumption is weak, private consumption remains limited to pockets, and economic growth is slowing, investors will watch out for the government's vision in it's third term, its fiscal targeting and consolidation path, borrowing requirements and spending priorities.
Fiscal Deficit: In Continuing Search Of Consolidation
For the ongoing year, fiscal deficit up to November 2024 was at 52.5% of the government's full year target led by a slowdown in capital expenditure. The government spent Rs 5.13 lakh crore compared to its target of Rs 11.1 lakh crore, 12% lower than the corresponding period an year ago.
Capital Expenditure: Continuing Thrust
In the third term so far, the intensity on capex has still not come forth and the government is set to clock around Rs 9.5 lakh crore in FY25 based on the current run rate which would be about 15% lower than the budget estimate of Rs 11.1 lakh crore, as execution lags and capacity to spend is coming under scrutiny, said Rahul Bajoria, India economist at BofA.
However, the government's thrust on capex is expected to continue in FY26. "We expect robust capital spending to remain a key theme in the Budget, both at the centre and state level, notwithstanding the weak trend in the current fiscal year," Morgan Stanley analysts stated in a note.
The government is likely to ensure continued improvement in the quality of overall expenditure, through higher capital spending, directed especially towards infrastructure, the note explained. This is likely to facilitate the multiplier impact on the economy and thereby bring about productivity-led sustained economic growth, it further read.
There is likely to be a potential increase in the allocation of funds towards 50-year interest-free loans to states, to augment state-level spending towards investment-led growth, the note stated. "We expect the government to facilitate a supportive credit infrastructure, fiscal support through incentives, rebates, that is likely to encourage the private sector to boost capex activity, especially in labour-intensive sectors, where India has a comparative advantage," the Morgan Stanley note added.
Gross Borrowings: Unlikely To See Much Change
Despite a consolidation in the fiscal deficit, gross borrowings are unlikely to change much. Given the larger nominal GDP, the absolute fiscal deficit number should rise to Rs 16.2 lakh crore, according to estimates by Morgan Stanley.
"We assume that around 69% of the deficit will be funded by borrowing from the market... Consequently, we estimate that net Indian Government Bonds issuance should continue declining to around Rs 11 lakh crore," it said.
Gross issuance could pick up modestly to around Rs 14.6 lakh crore due to the larger amount of repayments this year, where the government could use the GST Compensation Fund to offset part of the increase in the amount of IGBs maturing, it stated.
According to a research note by HSBC too, net market borrowing of the centre is likely to grow at a negative clip in FY26 with a lower fiscal deficit. A series of buybacks, likely switches by the central government, and the use of GST cess to fund maturing GST bonds, are likely to lower the repayments bill too, keeping growth in gross market borrowing at 0%, well below NGDP growth, according to Pranjul Bhandari, chief India economist at HSBC.
Nominal GDP Growth And Tax Buoyancy
Nominal GDP growth could remain at about 9.7% assuming real GDP growth of 6.5% plus a deflator of 3.2%, according to estimates by HSBC. While corporate tax revenues could recover, personal income tax could soften as capital gains tax slows. With indirect tax growth likely to remain in line with GDP growth, HSBC forecasts a tax buoyancy of one in FY26.
RBI dividend could remain elevated at the previous years’ ballpark, at least in INR terms (implying a slight fall in % GDP terms), supported by currency depreciation in a year of strong FX intervention (even though provisioning needs could be higher), Bhandari estimated. Meanwhile an upward push to disinvestment receipts will be important to keep overall revenues (as a share of GDP) as strong as the previous year, she added.
Revenue Deficit And Subsidies
Revenue expenditure is expected to to mildly overshoot FY25 revised estimates, driven by extra allocation towards subsidies, according top estimates by ICRA. Revenue expenditure is estimated at Rs 39.5–39.7 lakh crore in FY26 — a growth of 5.5–6%. This builds in a 9% increase in the interest payments, and a modest 3% rise in aggregate subsidy outlay, amid a limited 4.5-5.0% growth in balance revenue expenditure, according to estimates by Aditi Nayar, chief economist at ICRA.
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