- The budget will be key to signal commitment towards fiscal consolidation in and beyond FY25.
- Consumption, welfare, and agriculture focus is expected.
- Capex and infra spending will dominate the narrative.
- Manufacturing push and medium-term lens will be major features.
- We expect the FY25 fiscal deficit target to be 5% of GDP.
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The backdrop
As the authorities prepare their first Budget of the new term, they seek to remain on the path of deficit and debt consolidation while invigorating the economy to return to its pre-pandemic path. Final budget for FY25 will be tabled on July 23, following the interim edition that was released in February 2024 (see India Budget review: Pragmatism over populism). As we approach this budget, four developments are shaping market expectations:
- FY24 fiscal deficit narrowed by 20bp to -5.6% of GDP vs revised -5.8% of GDP, putting the central government’s consolidation at 80bp last year. This implies that borrowings were more that the financing need, leaving a bigger cash buffer, which sets the FY25 math on a favourable footing.
- Revenue windfall, following the strong run-rate in direct and indirect tax collections, and a record high surplus transfer from the RBI to the tune of INR 2.1trn (~0.6% of GDP) for FY24, compared to the budgeted INR 850bn, last year’s INR 874bn. This provides a fiscal cushion of 0.35-0.4% of GDP this year. Gross tax collections also surprised on the upside on higher personal income tax collections.
- A wider pool of investors following the index inclusion into global fixed income benchmarks which will increase the interest on fiscal performance and trajectory. India’s relatively high yields amongst the other index constituents will convince active managers to shift to an overweight stance for these papers, along with the dedicated passive names.
- The door remains open for a rating upgrade after the S&P’s outlook revision, subject to the scale of fiscal consolidation and improvement in trend growth.
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