Budget 2024: Fiscal Deficit Target May Be Cut To 5%, Says Nomura

India may lower its fiscal deficit target to 5% of GDP for fiscal 2025 from 5.1% set in the interim budget, according to Nomura Holdings Inc.

The first budget of Modi 3.0, to be presented on July 23, is expected to emphasise policy continuity and a steadfast focus on fiscal consolidation, despite the administration's weaker political mandate.

The report expects the government to leverage the higher Reserve Bank of India dividend and a lower fiscal deficit for 2024, about 0.2% of GDP, to manage the increased financial demands of its two key allies, estimated to be around 0.2% of GDP for fiscal 2025. This fiscal flexibility is projected to allow a reduction in the financial year 2025 fiscal deficit by Rs 62,400 crore compared to the interim budget. "No significant changes in subsidy allocations are anticipated," it said.

The government's market borrowing is expected to stay at Rs 14.1 lakh crore, although sales of T-bills may be reduced. The report also predicts the government will stick to the interim budget's tax revenue growth projections for fiscal 2024, with a lower growth rate in income tax collections due to anticipated concessions for middle-income households.

Nomura identifies five key themes: boosting consumption, focusing on the social sector, enhancing manufacturing, pushing infrastructure (with central government capex at 3.5% of GDP, up from 3.4%), and outlining a medium-term economic vision with a reform agenda and fiscal glide path.

The government may boost consumer demand by raising the standard deduction limit under the new tax regime, which offers no exemptions but lower rates. "Potential measures include increasing exemptions on bank interest income and lowering the personal income tax rate for the Rs 5-15 lakh slab, costing the exchequer Rs 25,000 crore, or approximately 0.08% of GDP. A similar amount could be allocated to raise the annual cash handout to farmers from Rs 6,000 to Rs 8,000," the report said.

For the social sector, the government is expected to increase spending on rural schemes. Housing subsidies may rise by Rs 23,000 crore, or approximately 0.07% of GDP, along with additional funds for rural roads and employment. Reports suggest expanding the public health insurance program by Rs 12,100 crore, or approximately 0.04% of GDP, and renewing the economic empowerment program for women.

In manufacturing, the government may boost domestic production by increasing the minimum local content requirement for public procurement, reviving the 15% concessional corporate tax rate for new facilities, overhauling the 2019 electronics policy, and extending the production-linked incentive scheme, according to Nomura.