Foreign brokerages and banks have given a thumbs up to Budget 2024 for its accelerated reduction of the fiscal deficit, stating that the Modi 3.0 government has addressed all essential macro-prudential concerns in the first union budget of its new term.
Noting that fiscal consolidation has got precedence post elections, Santanu Sengupta, Chief Economist, Goldman Sachs India highlighted that budget has played contrary to post-poll expectations of some relaxation in fiscal consolidation path and a pivot towards welfare spending from Capex.
Belying expectations, the budget presented actually prioritised fiscal consolidation and pegged target at 5-year low of 4.9 per cent of GDP for 2024-25. Furthermore, the consolidated fiscal deficit (centre plus state) will likely be around 7.7 per cent of GDP in 2024-25, again a 5-year low.
Sengupta noted that Budget has targeted a further reduction in the fiscal deficit to 4.9 per cent of GDP from the interim budget target of 5.1 percent of GDP in FY25. This comes after the government already surprised the market with a 5.6 percent of GDP fiscal deficit in FY24 (vs a target of 5.8 percent of GDP), he added.
Secondly, it has committed a total of target a fiscal deficit below 4.5 per cent of GDP in FY’25 and to subsequently align all fiscal deficit targets to keep central government public debt (as a percentage of GDP) on a declining path, Sengupta added.
Despite the fiscal consolidation the government retained the capex target at 3.4 per cent of GDP on a declining path, Goldman Sachs India report highlighted.
Upasana Chachra, Chief India Economist, Morgan Stanley and Ridham Desai, Equity Strategist, said in a post-budget Research Note that there are three key takeaways from the Budget: (a) Fiscal prudence through faster narrowing of the fiscal deficit, (b) maintaining capex momentum, and (c) focus on enhancing skills, job creation through new and targeted government schemes, which also improve medium-term growth potential with a likely increase in formal employment.
Budget has pegged a faster-than-expected reduction of the fiscal deficit in F25 on the back of stronger revenues,mainly RBI’s transfer of surplus, they said.
As such, the increased fiscal headroom (approx 0.4 percent of GDP) has been utilised to enhance government’s support in a targeted manner of job creation and skill enhancement, and to narrow the fiscal deficit, while maintaining capex growth as per the interim Budget.
“The Budget math is realistic, given that nominal GDP growth is expected to be 10.5 percent YoY and tax revenue growth pegged at 10.8 percent in F25. Most importantly, the focus of the Budget has been on creating a foundation for medium-term growth through schemes on employment, skill enhancement, improving productivity of agriculture, and support for the Micro, Small and Medium Enterprise (MSME) sector”, said the authors of the Morgan Stanley Research Note.
Radhika Rao, Executive Director & Senior Economist, DBS Bank said “Faced with a trade-off between fiscal consolidation and expectations of demand supportive measures, the FY25 Budget struck a fine balance”.
Overall Budget measures were focused on incremental steps across all key factors of production—labour (skilling, job generation), land, capital and productivity— as part of a roadmap to take the economy towards the Viksit Bharat 2047 goalpost of reaching a ‘Developed India’ status, Rao added.
Rao highlighted that Budget 2024 has tightened fiscal deficit target and aims to consolidate finances while avoiding a negative impact on growth and demand.
The revenue from RBI’s surplus transfer and robust direct taxes collections was allocated between reducing the fiscal deficit and increasing revenue expenditure, she added.
“The government has signalled a continued reduction in both deficit and debt levels, aiming for fiscal deficit of around 4.5 percent of GDP by 2025-26. The adjustment in the fiscal stance is expected to lead to better expenditure quality and reduced borrowing costs due to lower yields”, Rao added.