- The FY25 interim Budget delivered on three themes: a) fiscal compression;
- b) continued emphasis on capex;
- c) refrain from outright populism.
- The FY25 fiscal deficit is expected to narrow to 5.1% of GDP from a revised -5.8% in the current yea
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Summary:
India’s central government tabled the FY25 Interim Budget on Thursday, with the full-fledged version scheduled for mid-2024 after the general elections. The Budget delivered on three aspects, a) sticking with the fiscal consolidation path; b) emphasis on capex to improve the quality of the expenditure mix; c) refrained from outright populism. The Budget speech assumed political continuity for the incumbent government, helping to keep the reform and recovery agenda on track.
The Budget prioritised pragmatism over populism by focusing on higher capex disbursements and faster fiscal consolidation. We summarise key takeaways (supporting data tables are at the end of the report): Fiscal management - The revised FY24 deficit is estimated at 5.8% of GDP vs budgeted -5.9%. For FY25, nearly 80bp of consolidation has been assumed to -5.1% of GDP (vs market expectations of -5.3-5.4%). The FY24 fiscal deficit was also lower in absolute (rupee) terms. Affirming their commitment to the glide path, the finance minister reiterated the intention to move towards the -4.5% of GDP target in FY26. Nominal GDP is assumed at 10.5% yoy, slightly higher than our 10% assumption. For FY24, the underlying math was subject to three miss(es) and three hits. For FY25, the economic assumptions are conservative, therefore more realistic, and credible. Compared to the revised FY24 numbers, the consolidation planned for FY25 rests on a combination of compression in revenue expenditure (as % of GDP terms), coupled with a moderation expected in non-tax receipts.
A narrower deficit for FY25 also allowed for a reduction in borrowing, providing relief to the domestic debt markets. Gross borrowing was set at INR 14.13trn, notably lower than INR 15.4trn assumed in FY24, with net at INR 11.75trn vs INR 11.8trn in FY24. This surprisingly modest borrowing plan triggered kneejerk gains in the INR bonds, with yields on the benchmark 10Y index down ~10bp intraday. This will help keep a lid on cost of borrowing, lower public sector dissaving and crowd-in the private sector. With the non-inflationary Budget behind them, the RBI will be focused on domestic inflation and global developments.
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