Going Slow & Steady

Interim budget delivered on balancing fiscal austerity with growth. Six takes.Going slow on flexibility | Pandemic years saw a global return of Keynesian flexibility in fiscal policy. It’s wise now to undo this flexibility gradually. Towards this, GOI pegged FY25 fiscal deficit to GDP ratio at 5.1%, and over-delivered on its FY24 target of 5.9% by 10 bps. Marking a consolidation of 410 bps from fiscal deficit peak of 9.2% in FY21, target for FY25 also allows a near-linear downwards move towards a 4.5% fiscal-deficit aim for FY26 well within reach.Sound math | 70 bps of fiscal consolidation envisaged between FY24 and FY25 has been laid out on realistic revenue assumptions (revenue receipts to grow by 11.2% FY25), subdued increase in revenue expenditure (3.2% y-o-y) accompanied by a modest increase in capex (16.9% y-o-y) compared to recent past (30% avg growth over past 4 years). Two potential deviants could be:FY25 disinvestment proceeds pegged at ₹500 bn, given FY24’s poor track record, and a shorter timeline of 9 months after Lok Sabha election.Downside in subsidy burden that may be at risk if global fertiliser prices remain high.Notwithstanding risks, fiscal math appears reasonable, along with 10.5% assumption of nominal GDP growth in FY25.More private sector | While the pace of capex is set to moderate, GOI’s capex thrust remains intact with capex to GDP ratio expected to rise from 3.2% in FY24 to 3.4% in FY25. While meaningful fiscal compression did warrant the government to take its foot off capex accelerator partially in FY25, it was also somewhat more necessary to not ‘crowd-out’ resources for private sector – a point FM alluded to in her speech.Healthy corporate sector balance sheets, comfort on input costs and a sizeable upturn in capacity utilisation should allow for meaningful turnaround in private sector capex in FY25, once election-related uncertainty subsides. This with household investment in residential capex remaining healthy – nearly 40% of total capex – should allow for a broad-based upturn in capex cycle. Continuity pitch | The Budget was devoid of new schemes that could be inflationary. Successful policy outcomes of last decade were reinforced with promise of continuity via rural housing, extension of tax benefits to start-ups, and ₹750 bn to states as long-term interest-free loans.Fiscal rectitude | GOI seeks to lower gross borrowing to ₹14.13 tn in FY25, from ₹15.43 tn in FY25. Comfort on supply, juxtaposed against potential increase in demand from global investors given India’s impending inclusion in Emerging Markets (EM) Bond Indices, is right mix to free resources for the private sector. Global investors’ concerns were put to rest as GOI walked the talk on fiscal rectitude.Rising government debt | India doesn’t face a ‘fiscal problem’, but may seem to have a ‘debt problem’. While GOI’s been fiscally conservative for the last 3 years, total general government debt continues to remain northwards of 80% of GDP. This indeed is higher when compared to average debt level of about 55-60% for other similar-rated EM peers. One could argue India’s debt level poses low risk, given it is domestically financed and of longer tenure.In FY25, one can expect the total debt ratio to nudge lower, given expectations of smaller primary deficit (BE of 1.5% of GDP in FY25 vs 2.3% in FY24) and resilience in GDP growth. In the medium term, strategic investments, inclusive growth and commitment to reforms must accompany fiscal prudence to reduce debt. The interim budget was delivered on being minimalist, keeping fiscal machinery rolling until full budget. It did however more than ace fiscal KRAs.