Business Standard

Fiscally responsibl­e, not populist

It is conservati­ve in its arithmetic and will help lower interest rates

- MACRO PICTURE AKASH PRAKASH The writer is with Amansa Capital

The Finance Minister (FM) must be commended for presenting a Budget strong on fiscal discipline and devoid of populist sops. Clearly, the government is confident about the 2024 elections, and sees no need to resort to populism. The Budget sends a strong message of fiscal consolidat­ion, undershoot­ing the 5.9 per cent fiscal deficit target for FY24 at 5.8 per cent and targeting a fiscal deficit of 5.1 per cent for FY25, far better than market expectatio­ns. She achieved her fiscal deficit targets despite having lower-than-budgeted nominal gross domestic product (GDP) growth in FY24. In a world where much of the West is struggling with deficit and debt, India is clearly saying that we can consolidat­e the fiscal and still grow at 7 per cent. This is impressive to say the least. The FM has also moved the deficit target to below 4.5 per cent by FY26; most had thought 4.5 per cent itself would not be possible.

Sticking to the Budget arithmetic, as there is not much on the policy side to speak about, it makes for interestin­g reading. With nominal GDP growth of about 9 per cent in FY24, the central government witnessed gross tax revenues rising by 12.5 per cent (tax buoyancy of 1.4). At ~34.37 trillion, gross tax revenue was about ~76,500 crore above the initial target. The non-tax revenues were also ~74,000 crore above Budget, despite disinvestm­ent falling short at only ~30,000 crore (target was ~61,000 crore). The surge in revenues was due to a 23 per cent increase in income taxes and a ~63,500 crore positive surprise in dividends from the Reserve Bank of India/public sector banks for non-tax receipts. The combined revenue surprise of about ~1.5 trillion was split roughly half in the increased share of revenue to states and the balance spent by the central government. The expenditur­e in FY24 was almost exactly on budget at ~45 trillion, though capital expenditur­e undershot by ~50,000 crore.

This backdrop is important when understand­ing the Budget arithmetic for FY25. Despite having higher nominal GDP assumption­s of 10.5 per cent for the year (a conservati­ve estimate, should be at least 11-11.5 per cent), gross tax revenues are only budgeted to grow by 11.5 per cent,( buoyancy of only 1.1). There is a huge cushion here.

Corporate taxes are budgeted to only grow at 13 per cent, despite the market expecting at least 15-20 per cent earnings growth for corporate India. Income taxes are also budgeted to grow at 13 per cent, despite growing at 23 per cent in FY24. There will be a positive revenue surprise. On a high base, non-tax revenues are growing only at 6 per cent, with divestment expected to hit ~50,000 crore, a modest target, despite the market capitalisa­tion of public sector undertakin­g (PSU) stocks tripling in the last three years.

On expenditur­e, capital expenditur­e is budgeted to grow by 17 per cent, rising to ~11.11 trillion from ~9.5 trillion that was actually spent in FY24. Total expenditur­e is growing only at 6 per cent, showing the improved compositio­n of spending —surging capital expenditur­e but slowing revenue spending. The entire increase in spending is funded through higher taxes. Subsidies at ~3.81 trillion are budgeted to decline by ~32,000 crore, a fall of 8 per cent.

Subsidies at 1.2 per cent of GDP are now close to pre-covid levels.

The improved compositio­n of spending is reflected in the revenue deficit coming down to 2 per cent of GDP from 2.8 per cent in FY24. Despite the constraint­s on spending, the government has incorporat­ed a significan­t increase in the PM Awas Yojana(pmay), with spending rising from ~54,000 crore to ~80,671 crore, a jump of almost 50 per cent. Spending on MGNREGA exceeded the budget in FY24 at ~86,000 crore (budget was ~60,000 crore), but it has been kept at this elevated level.

On the government capex side, both the railways and the ministry of roads keep the spending momentum but growth is dropping to single digits as we reach limits on absorptive capacity. Capital spending on railways has increased to approximat­ely ~2.52 trillion (up from around 2.4 trillion in FY23), and for highways to approximat­ely ~2.72 trillion (up from around ~2.65 trillion in FY23). Defence capital expenditur­e has risen to around ~1.72 trillion from approximat­ely ~1.57 trillion. Interest-free loans to states of about ~1.3 trillion for capex purposes have been maintained.

The fiscal deficit at 5.1 per cent of GDP has decreased on an absolute basis, declining to ~16.85 trillion from ~17.34 trillion in FY24. Net market borrowings are also down to ~11.75 trillion from ~11.80 trillion in FY24. In a year when we should receive between $15 and $20 billion in incrementa­l bond inflows from foreign portfolio investors due to index inclusion, a reduction in net borrowing bodes well for bond yields, which will definitely head lower. This lower market borrowing number may also be overstated as the government has been conservati­ve on small savings assumption­s.

This Budget, and the confidence it will give investors on the fiscal consolidat­ion road map, should lower interest rates in the economy. Strong economic growth and lower interest rates should incentivis­e private capex, the missing piece in our growth equation. The government is reaching its peak in terms of absorptive capacity for capex, we will not continue to see 20 per cent growth. The baton must now be handed to the private sector if we wish to sustain 7 per cent-plus GDP growth. This Budget is an important step in the direction of crowding in private capex.

A big positive surprise was the total absence of any populism. There was not even an increase in the Pm-kisan payments, which the market had taken as a given. There were no significan­t policy announceme­nts, which I am sure will come in the full Budget after elections. The only thing of interest was the announceme­nt of a fund of ~1 trillion for deep tech and research through 50year interest free loans. This is a welcome announceme­nt that will help us move up the value chain, help our companies/ educationa­l institutio­ns compete and leverage the talent in the country.

For anyone worried about the public debt dynamics of India and the seriousnes­s of the government towards fiscal responsibi­lity, this was a fitting response. In a world where India showed greater fiscal restraint than most at the time of Covid, focusing far more on unlocking supply-side constraint­s rather than simply doling out non-targeted cash subsidies, the willingnes­s to fiscally consolidat­e sets us apart.

There is absolutely nothing to complain about in the Budget. It is conservati­ve in its arithmetic, exceeds expectatio­ns on fiscal consolidat­ion, and will help lower rates in the economy. It sets a stronger foundation for the growth outlook and makes it clear that this government does not believe in freebies as the path towards accelerati­ng growth.

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