Unveiling the Anticipated Thrills of FY2024 Budget

Highlight

With upcoming interim Union Budget for 2024-25, major policy changes are unlikely. However, attention will be on Government of India's capital expenditure (capex) expansion & fiscal consolidation. Expectation is fiscal deficit target for FY2025 to be 5.3% of GDP, midway between expected 6.0% for FY2024 & medium-term target of sub-4.5% by FY2026. Anticipating noticeable decrease in revenue deficit, this allows for capex target of ₹ 10.2 trillion for FY2025, 10% increase from expected FY2024 level. Higher capex target could challenge government’s task of reaching medium-term fiscal deficit target by FY2026

The expectation for FY24

The Government of India's (GoI) income is expected to surpass estimated budget for fiscal year 2024, primarily due to higher net taxes & non-tax revenues, including increased dividends from Reserve Bank of India. Spending is anticipated to align with budgeted amount, with lower capital expenditure offsetting higher projected revenue expenses.

Fiscal deficit is not expected to exceed budget estimate for fiscal year 2024. However, lower-than-expected nominal GDP may result in fiscal deficit being around 6.0% of GDP, slightly higher than initial estimate of 5.9%. Despite this, government borrowings are likely to remain in line with budgeted amounts.

Expectations for FY2025

Considering positive economic conditions & expectations of stable domestic environment in upcoming fiscal year, it is anticipated that Government of India (GoI) will continue its fiscal consolidation efforts in budget for FY2025. However, this may result in slower increase in capital expenditure compared to post-Covid years, potentially impacting economic growth. As upcoming budget is expected to be interim for vote-on-account, major policy changes are not likely at this point.

Here are some key points   

1. The GoI's gross tax revenues are projected to grow by healthy 11% in FY2025, driven by direct taxes & GST collections. Excise & customs duty growth may be subdued.

2. The disinvestment target for FY2025 is likely to be set below ₹ 500 billion, considering uncertainties in market transactions. Setting moderate target is deemed prudent to avoid budget disruptions due to potential shortfalls.

3. Revenue expenditure is expected to increase modestly by around 4% in FY2025, with focus on controlling interest payments & reducing other expenses.

4. The GoI is estimated to allocate ₹ 10.2 trillion for capital expenditure in FY2025, reflecting relatively subdued year-on-year expansion of around 10%, compared to significant growth observed in post-Covid years. This slowdown in capital expenditure growth may have some impact on economic activity & GDP growth.

5. Anticipated for fiscal year 2025, Government of India aims for fiscal deficit of 5.3% of GDP, positioned between expected 6.0% in 2024 & medium-term goal of 4.5% for 2026. This marks positive decline in absolute fiscal deficit to ₹ 17.1 trillion in 2025 from budgeted ₹ 17.9 trillion in 2024. Surpassing estimated capex of ₹ 10.2 trillion for 2025 might challenge government’s ability to achieve necessary fiscal consolidation, making medium-term target for 2026 more demanding.

6. As per estimates, 10 basis points expansion in fiscal deficit-to-GDP ratio could allow for additional capex of around ₹ 324 billion.

7. For fiscal year 2025, 15th Finance Commission recommends normal borrowing limit of 3.0% of Gross State Domestic Product (GSDP) for state governments. Considering this & expectations of government’s fiscal deficit, General Government deficit is likely to decrease to 8.3% of GDP in 2025 from expected 9.2% in 2024, reaching lowest level since 2020 (7.2%).

Conclusion

Anticipating interim Union Budget for 2024-25, focus lies on capital expenditure & fiscal consolidation. Experts expects positive fiscal deficit target of 5.3% of GDP for FY2025, balancing between 6.0% FY2024 estimate & sub-4.5% medium-term target for FY2026. Despite potential challenges, including nominal GDP-driven fiscal deficit around 6.0%, government borrowings are expected to align with budgeted amounts. Positive expectations for FY2024 include expected income surpassing estimates & controlled spending, while FY2025 foresees conservative disinvestment target & moderate growth in revenue expenditure.  outlook suggests cautiously optimistic trajectory for fiscal performance.