A Responsible Budget That Radiates Bharat’s Confidence
If one were to hazard a guess on the pre-election budget in a large democracy, chances are that most experts would build in expectations of some specks of income transfer or largesse to spruce up consumption and sentiment. Why go far? Just a cursory look at all the commentary and views in the run up to the Interim Budget would make it amply clear that while there wasn’t an expectation of overt populism, but a moderate helping hand for consumption in pre-election political messaging, and some demand side support to boost consumer confidence was largely built into broader expectations by most.
So how did the interim budget turn out and what does it showcase then?
Confidence: The budget was one of the most refreshing budgets, oozing loads of confidence in India’s march on the growth highway. The FM did an outstanding job by keeping her word and sticking to the definition and spirit of a ‘’vote on account’’ budget, eschewing temptations of grandiose announcements or any tax rejigs to sway sentiments. It is commendable the way the budget shunned any possible negatives (overt populism & big tax giveaways).
The confidence becomes more evident when one looks at the extent of fiscal rectitude. The govt has surprised positively on fiscal consolidation despite the general election backdrop. The Centre’s fiscal deficit has fallen from 6.4 per cent of GDP in FY23 to 5.8 per cent in FY24 (as against a target of 5.9 per cent) and more importantly, it is expected to go down sharply to 5.1 per cent in FY25. It is remarkable that the government has managed to keep expenditure growth in check even in a pre-election year. In FY24, total expenditure was budgeted to grow by 6.9 per cent but in the revised estimate it is shown growing even lesser at 6.7 per cent. This is likely to continue in FY25 with total expenditure being budgeted to grow at 6 per cent, almost half of the growth in tax revenues.
Continuity & Consistency: In a world of polycrisis and policy goof ups in the developed cohort, the sheer consistency via commitment to fiscal discipline, capex-led growth and higher quality of expenditure is a standout story. The Budget has continued to lean on higher quality Capex thrust which has been a key element of messaging and has supported bullish India story narrative. Capex is slated to grow at 17 per cent YoY after tearaway growth over the last three years. The Revised FY24 numbers reveal that the government will fall short of achieving its Rs 10 trn mark by ~Rs 500 bn and hence the FY25 growth rate will be higher than the 11 per cent cited in the budget. This was critical as stronger government capex spending has been a critical pillar of economic activity in an adverse global macro backdrop. The budget has also proposed three railway corridor programmes -- for energy, mineral and cement to decongest the high-traffic corridors which together with dedicated freight corridors will accelerate growth and reduce logistic costs. The interim budget has bet big on tourism and spiritual tourism and proposed to enhance infrastructure and connectivity to facilitate domestic tourism on islands, including Lakshadweep. A new scheme will also be launched for strengthening deep-tech technologies for defence purposes while raising the defence Capital outlay by 9.4 per cent to Rs 1.7 lakh crores.
Such continuity – especially at a time when the world is reeling under a lot of uncertainty and disruption - will be reassuring for investors and rating agencies alike. This will further enhance India's macroeconomic policy stability and set it apart from other developed & developing economies as a standout story.
Credibility: For any budget the litmus test is the Credibility of the budget arithmetic. The aspect of credibility assumes even bigger importance in FY25 given India’s inclusion in the global bond indices, which will entail greater scrutiny of the Budget numbers. On the revenue side, tax revenue growth of ~12% seems conservative given the underlying growth momentum and tax buoyancy. The nominal GDP growth rate of 10.5% also seems modest and there could be positive surprises. As for the expenditure side, the assumption of 6% growth seems reasonable given the recent track record. However, we must understand that the numbers and assumptions can undergo some revision during the full Budget which is to be presented sometime in July.
In a very prudent move, the borrowings have also been kept in check as India’s public debt ratio, at 83% of GDP, is higher than all other non-G7 major G20 economies. The government is also likely to meet its FY24 gross and net market borrowing target of Rs 15.4 trillion Rs 11.8 trillion respectively. Importantly, in FY25 the government will lower its borrowings a tad to Rs 14.1 trillion in gross terms and Rs 11.7 trillion in net borrowings. This lowers India’s relative macroeconomic vulnerability in today’s turbulent world where high public debt can be a source of many ills.
The Interim Budget endeavors to ensure that deficits and debt are on a sustainable path and at the same time achieve a sensible support to the growth momentum by way of focus on catalysing innovation, raising outlays on PLI schemes, Semiconductors, green investments, affordable housing and focus on Naari Shakti with its ‘Lakhpati Didi’ scheme.
(Group Chief Economist, L&T. Views personal)
