The forthcoming Union Budget for the fiscal year 2025, set to be unveiled on February 1, 2024, is poised to be an interim budget, bearing the transitional responsibility of managing fiscal affairs until the formation of a new government post the general elections in May 2024. While interim budgets traditionally abstain from making sweeping policy statements, they play a pivotal role in setting the stage for future fiscal decisions.
Emkay Global Financial Services, in its recent report, emphasizes the interim budget’s significance in shaping forthcoming policy decisions, specifically focusing on fiscal consolidation rates and priorities in both capital and non-capital expenditure sectors.
Despite the inherent limitations of an interim budget, it becomes a critical juncture for evaluating fiscal revenues, outlays, and projections for the upcoming fiscal year. Emkay Global predicts a continuity in policy direction, citing the ongoing trade-offs between stimulating growth recovery and managing fiscal constraints with challenging debt dynamics.
The brokerage anticipates a nuanced approach in the budget, navigating the delicate balance between nurturing growth and addressing the fiscal limitations. While competitive populism at the central level may be less likely, Emkay Global expects relief measures for rural, agricultural, and welfare sectors. The forecasted capex/GDP of 3.3% signals an improvement in the capex/revex ratio, despite a slowdown in tax growth. The gross tax to GDP ratio is projected to remain stable at 11.4%.
Emkay Global’s analysis projects the Gross Fiscal Deficit (GFD) to GDP ratio at 5.4% for FY25, a marginal decrease from 5.9% in FY24. With net and gross borrowing standing at significant levels of ₹11.5 trillion and Rs15.2 trillion, respectively, the fiscal funding mix is expected to include 65% through net borrowing and 25% through small savings.
The fiscal policy assessment underscores the market’s focus on the headline objective, reflecting the delicate task policymakers face in maximizing fiscal stimulus while aiming for consolidation. The evolving political landscape and consolidation of power, as indicated by Emkay Global’s research, have tempered the pro-cyclical inclinations of policymakers during election cycles.
While acknowledging the evolving policy challenges, Emkay Global suggests a potential lingering pre-election year populist bias. Nevertheless, the brokerage’s analysis excludes the likelihood of aggressive, competing populism, aligning with the changing dynamics in political decision-making.
In essence, the FY25 interim budget is poised to play a crucial role in steering fiscal priorities and policy trajectories, offering a glimpse into the government’s strategy for navigating economic challenges while ensuring sustainable development momentum.