The interim budget kept to its essence, marked by a short speech presentation, overview of key milestones achieved over the past decade, a statement of intent for the way forward and prioritized macro stability over short-term demand impulses. We characterize the budget as leaning towards pragmatism over populism.
The budget delivered on three counts, 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.
For FY24, the underlying math was subject to three miss(es) and three hits. The nominal GDP assumption was revised down, recurring/ revenue spending was above budgeted, while the divestment target was halved in the revised estimate for FY24. These strains were offset by a stronger gross revenue buoyancy of 1.4x (FY24 RE vs FY23) compared to ~1.0x (FY24 BE vs FY23).
This was accompanied by better dividend pay-outs by state-owned firms which helped lift non-tax revenues, whilst capital expenditure was lower than budgeted in the revised estimate. This interplay helped to lower the FY24 RE to -5.8% vs BE of -5.9% of GDP. There is room for the revised revenue numbers to emerge stronger in the Jan-Mar 24 period, which will allow to absorb the additional revenue spending requirements.
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.
The Centre’s capital expenditure is slated to rise by 11% in FY25 compared to FY24 (BE) to ₹11.1 trillion, amounting to 3.4% of GDP, doubling in the past five years. Adding the ‘grant in aid of creation of capital assets’ and ‘resources of public enterprises’, the effective capex rises to ₹18 trillion in FY25 compared to ₹11 trillion in FY20 before the pandemic. At an aggregate level, higher multiplier of capex vs revenue expenditure bodes well for enhancement of the economy’s capital stock and productive capacity, as well as improving the overall quality of the expenditure mix.
A narrower deficit for FY25 also allowed for a reduction in borrowing, providing relief to the domestic debt markets. Of note the gross borrowing was lower than consensus as the GST compensation cess was dipped into to adjust the maturity of the redemptions – effectively lowering it to ₹2.38 trillion from previously assumed ₹3.6-3.7 trillion.
As it stands, a lower or similar borrowing number for FY25 compared to this year would also have been taken by the markets in their stride, with the demand mix likely to find support from domestic investors and an incremental increase in foreign interests.
Foreign interest in eligible sovereign bonds via the fully accessible route (FAR) remains strong this year, ahead of the inclusion of Indian government bonds (IGBs) into the two global fixed income benchmarks from mid-2024. The FAR window has attracted $2.2 billion worth inflows, after a record $8.1 billion in 2023, as investors switched out of other debt facilities. The total value of foreign investments under this route has risen by more than 50% vs late-Q323. Among the various tenors, ownership is highest (21.4%) in the liquid 2028 paper followed by 2030 maturity (15.3%).
With a non-inflationary budget behind them, the Reserve Bank of India will be focused on domestic inflation and global developments. We expect the RBI's monetary policy committee (MPC) to extend their pause in February. With the US Fed still non-committal on their policy pivot, the MPC is likely to avoid a pre-emptive dovish shift.
The sequence is likely to entail a recalibration in liquidity stance, with early signs of an increase in the frequency and size of repo operations to ease the extent of shortfall already underway.
With core inflation at moderate levels, the MPC might consider a change in stance to neutral at the April meeting, before considering policy easing in second half of the year. This will also help narrow the real rate spread, by extension lowering the extent of growth sacrifice as well.
Radhika Rao is Senior Economist and Executive Director, DBS Bank, Singapore