BofA Sees India Reaching 4.9% Fiscal Deficit Target For FY25 Despite Growth Slowdown
Nominal GDP growth will slow down to 9% year on year against 11% budgeted despite three strong tax receipts.
Despite a growth slowdown in India, the fiscal deficit target for the current financial year 4.9% will be met because of higher than expected non-tax receipts and dividend payment from the Reserve Bank of India, according to BofA. It expects the Government of India to peg fiscal deficit target at 4.5% for the financial year 2026.
Nominal GDP growth will slow down to 9% year on year against 11% budgeted despite three strong tax receipts. With the declining economic growth, a balance between consumption, capital expenditure, and fiscal consolidation is a key to watch, BofA said in a note.
The budget for financial year 2026, will be a tough balancing game between consumption, capital expenditure, and consolidation for the Indian government. With limited consumption, capital expenditure boost, BofA expects the budget announcement on Feb 1 will most likely disappoint.
The Indian government will likely stimulate consumption, possibly through lower income taxes, according to the brokerage. Capital expenditure allocation will likely rise 14% on the year.
Capital expenditure spending will most likely disappoint in the financial year 2025. Low capital expenditure will likely be a risk for the capital expenditure focused industrials, cement, and steel sectors.
Consumption space will likely benefit from potential stimulus and it will help to strengthen the rural revival cycle. FMCG firms like Hindustan Unilever Ltd., Dabur India Ltd., Marico Ltd. will likely be a key beneficiaries.
Cigarettes may see a modest single-digit tax increase considering limited tax changes in the past few years, according to BofA. The brokerage believes cigarette companies like ITC Ltd. will benefit given higher price hike opportunity. No tax change will be a possibility.
