A budget of fiscal prudence for Viksit Bharat

The devil is in the fine print, but prima facie, Finance Minister Nirmala Sitharaman, in her sixth year of budget announcements, has steered clear of any major deviations from the path of fiscal consolidation. Image: Anushree Fadnavis/ Reuters
 

It is hard for a government to not bite the bait of populism ahead of general elections. The devil is in the fine print, but prima facie, Finance Minister Nirmala Sitharaman, in her sixth year of budget announcements, has steered clear of any major deviations from the path of fiscal consolidation. The budget team has delivered an investment-led budget that aims for inclusive growth. There is a sprinkling of sops too, but the thrust is on capital expenditure, infrastructure, and housing.    
 
“The vote on the account is citizens pride and peers’ envy. It has achieved the impossible trinity of inclusive growth, infrastructure investment, and fiscal prudence,” remarks Nilesh Shah, managing director, Kotak Mahindra AMC.
 

Vishal Kampani, non-executive vice chairman, JM Financial, agrees. He says the budget has laid the framework for robust growth in the coming years.  
 
“The focus continues on fiscal consolidation while balancing the infrastructure development and sustainability goals of the economy. Refraining from being too populist, the government targeted inclusive development by announcing measures which have a far-reaching impact on the economy,” Kampani adds. “Also, there is a promise to lay the detailed roadmap and strategy for Amrit Kal in the full year budget in July 2024.”
 
Adopting a counter-cyclical approach, the government opted for fiscal discipline to achieve its target of lowering the fiscal deficit to 4.5 percent of the GDP by FY26. In fact, it marginally outperformed: Fiscal deficit of 5.8 percent and 5.1 percent for FY24 and FY25 respectively is lower than its earlier estimate of 5.9 percent and 5.3 percent.
 
“This was not a pre-election budget. While the budget speech talked a lot about the key voter constituents, it has chosen to prioritise fiscal consolidation. This bodes well for macro stability and will be seen as positive by the RBI as well,” says Sonal Varma, managing director and chief economist- India and Asia ex-Japan, Nomura.
 
Undoubtedly, tax buoyancy in the current fiscal year helped. In FY24, revenue receipts came in at Rs 27 lakh crore versus the budget estimate of Rs 26.3 lakh crore. This is projected at Rs 30 lakh crore next fiscal. Revenue expenditure marginally rose to Rs 35.4 lakh crore versus the budget forecast of Rs 35 lakh crore.
 
The major revenue outgo for the government comprises food subsidy and fertilisers and is seen at Rs 2 lakh crore and Rs 1.64 lakh crore each. This is lower than last year’s spending of Rs 2.1 lakh crore and Rs 1.9 lakh crore each.

In the coming fiscal, the finance minister has budgeted for a nominal GDP growth of 10.5 percent and gross tax revenues are expected to rise 11.5 percent y-o-y in comparison to 12.5 percent in FY24. “There will be some hits and misses, but it seems achievable overall,” Varma adds.

Also read: Budget 2024: The only surprise, no surprise

Buoyant tax collection cushioned the impact of a significant shortfall on the divestment front.  The government revised its divestment target to Rs 30,000 crore for FY24 and aims to garner close to Rs 50,000 crore from stake sale in PSUs next year.  
 
Capital expenditure, as explained in our pre-budget series, will grow at a slower rate of about 11 percent to Rs 11.11 lakh crore as per the interim budget announcements today. There could be a further boost in the full budget allocations to be announced by the elected government is July. However, the capex allocation is nearly 3.4 percent of the GDP and its multiplier-effect can fast-track growth.
 
“Over the last 2-3 years, private capex was weak, so public capex stepped in. Now with private capex likely to pick up, the government is slowly stepping back to prevent crowding out,” Varma says.
 
However, consumption has been lacklustre and some sections of the market expected more measures to spur rural demand. “A bit of a dampener is lack of any big push for consumption. Consumption has been weak, especially in rural India, as indicated by corporate earnings for the last few quarters. The budget doesn’t provide any near-term solution for quick revival for consumption,” says Motilal Oswal, managing director and CEO, Motilal Oswal Financial Services.

Importantly, gross government borrowing at around Rs 14 lakh crore is lower than FY24 and street estimates. Last fiscal government borrowing stood at Rs 15.43 lakh crore. This gives the Reserve Bank of India room to cut rates earlier.
 
After the announcement, the ten-year bond yield declined by nearly 10 basis points to 7.05.
 
“This is an anti-inflationary budget in an election year. The finance ministry is clearly aiming for rating upgrade with aggressive fiscal deficit reduction target as we (have a low) investment grade rating. Further drop in yields is expected due to flows from foreign institutional investors and expectation of India’s rating upgrade,” says Murthy Nagarajan, head-fixed income, Tata Asset Management.