Fiscal consolidation, a positive surprise

The two main metrics of interest in the interim Budget were the fiscal deficit and capex figures, in addition to the new policy signals being hinted at by the government.

In a positive surprise, the government pegged its fiscal deficit at 5.8 per cent of GDP and 5.1 per cent of GDP, respectively, in the Revised Estimates (RE) for FY24 and the Interim Budget Estimates (BE) for FY25, lower than ICRA’s expectation of 6 per cent and 5.3 per cent, respectively. Moreover, capital expenditure for both these years is higher than what we thought the fiscal math would support. With this, the quality of the fiscal deficit is set to continue to improve further, with the entire decline of 70 basis points (bps) over the lower-than-expected print of 5.8 per cent for FY24 stemming from a cut in the revenue deficit.

In our view, the fiscal math is underpinned by realistic growth assumptions for taxes and a muted increase in revenue expenditure, although we have some concerns around the budgeted numbers for non-tax revenues. While the government has indicated a 6.4 per cent growth in non-tax revenues in FY25, over a large overshooting to the tune of ₹750 billion in FY24 RE, we remain sceptical on this front. It has pegged the receipts on account of dividend/surplus of RBI, nationalised banks and financial institutions at ₹1 trillion, in line with the FY24 RE. We expect the actual collections on this account to be lower in FY25. Besides, the budgeted amount from other communication services, at ₹1.2 trillion, seems somewhat optimistic.

Even though the government has assumed slightly higher nominal GDP growth of 10.5 per cent as against our projection of 9.5 per cent, the budgeted growth of 11.5 per cent in gross tax revenues (GTR) is largely in line with our estimates. Notably, the Budget pegs the GTR at 11.7 per cent of GDP in FY25 as against 11.6 per cent in FY24, which is the highest level since FY08.

On the expenditure front, the growth in revenue expenditure has been limited to 3.2 per cent in FY25, in line with the low single digit growth seen in each of the last two years, aided by a mild dip in the subsidy burden, albeit on a higher-than-budgeted turnout in FY24. The government’s non-interest non-subsidy revenue expenditure is budgeted to rise by a meagre 0.6 per cent in FY25 after growing by 3.9 per cent in FY24. The government has pencilled in an amount of ₹860 billion for the National Rural Employment Guarantee Scheme in FY25, in line with the revised amount for FY24. This is largely in line with our estimate of ₹800-1,000 billion.

Capex hikes

The government’s large capex hikes had dominated headlines in each of the last three Budgets in the post-Covid period. On an enlarged base, the budgeted hike in FY25 is healthy at 16.9 per cent, with the gross capex pegged at ₹11.1 trillion as against the RE of ₹9.5 trillion for FY24. Interestingly, this increase is largely led by a fresh allocation of ₹705 billion for new schemes by the Finance Ministry, without any further description for the same. Moreover, the budgeted amount for the special assistance to the States for capex has been pegged at ₹1.3 trillion in FY25, 23.2 per cent higher than the revised amount of ₹1.1 trillion for FY24. This would continue to lend support to States’ capex in the next fiscal.

The on-Budget capex on roads and railways has been hiked by just 2-5 per cent in FY25, while still accounting for 47.1 per cent of the total capex. Notwithstanding the modest increase, the size of the spending remains quite large and is likely to augment activity in projects that are under implementation and aid in project completions in these segments.

In contrast to the robust increase in the budgeted capex, the growth in the CPSE’s Internal and Extra Budgetary Resources (IEBR) is modest at 5.2 per cent in FY25, although this is the first instance of an increase in the last five years. Adding this to the government’s gross capex, the total capex of the Centre and the CPSEs (IEBR) is expected to rise by a 13.9 per cent to ₹14.5 trillion in FY25. This amounts to 4.4 per cent of GDP against 4.3 per cent in FY24 RE and would play an important role in supporting construction activity and investment demand during the next fiscal.

We are enthused by the reiteration of the medium-term target of bringing the fiscal deficit below 4.5 per cent of GDP. However, with the on-Budget capex amounting to 3.4 per cent of GDP, further fiscal consolidation beyond FY25 would progressively become more challenging.

The writer is Chief Economist, Head-Research & Outreach, ICRA