Generally, budgets that follow the interim budgets announced by the same government do not have many changes. There is no reason to expect differences this time, considering the economy is performing well and growing at above 7% for FY25, with all high-frequency indicators being positive. So, what should we look for in the budget?
There has been a tendency to outline the economic ideology in every budget, with the Finance Minister highlighting the areas of focus. Education and skill development are likely to be emphasised, as they are medium-term goals of the government to ensure sustainable employment in the coming years.
The Fiscal Deficit Ratio
In terms of content, the following issues are of interest. First is the fiscal deficit ratio targeted for the year. The interim budget mentioned 5.1%, which worked out to 5.2% when the provisional numbers for nominal GDP came in lower. Since all budgets are drafted after pegging the fiscal deficit ratio, this will be the starting point. It may be expected that a slightly lower number, around 5%, will be targeted to make the task for FY26 more manageable, which is aiming for a 4.5% deficit. There might also be indications for the future fiscal path, as with steady economic growth in the next few years, the goal of 3% could be back on the table.
Second, the market is abuzz with the deployment of the additional Rs 1 lakh crore that the RBI has passed on to the government. For the entire banking sector, the target was Rs 1.1 lakh crore, which included dividends paid by the PSBs and other public financial institutions. As the surplus to be transferred is at least Rs 1 lakh crore higher, there is a cushion provided to the RBI. At one extreme, the fiscal deficit could be reduced from Rs 16.85 lakh crore to Rs 15.85 lakh crore. More likely, this advantage will be partly used to address other issues in the budget on both the expenditure and revenue sides.
Tax Rationalisation
Third, on the revenue side, there is a call for tax rationalisation, especially at the individual level. Consumption has been tepid in the last few years due to lower income generation at the household level and high cumulative inflation, reducing individuals' purchasing power. Cutting tax rates or widening the income slabs for taxation will help stimulate consumption. Moreover, the salaried class, which pays the highest taxes to the government, including GST, has not received any benefits so far. And they are looking at the budget with expectations.
Fourth, savings have been affected in the last couple of years, with household financial savings declining. This trend followed the pent-up demand phenomenon and higher inflation, which shifted income towards essential consumption. To revive savings, the government could encourage savings through tax-saving schemes and interest paid on home loans. This would help increase both income and savings. This measure, along with tax cuts, will address issues of consumption and savings. The old tax scheme can be reviewed from the savings perspective, while the new tax scheme can promote increased consumption.
Fifth, investment has been slow to pick up due to limited private investment, caused by surplus capacity. To break this gridlock, demand needs to be generated, which can happen only with increased income, dependent on job creation. From a fiscal standpoint, focusing on MSMEs could be a solution, as they contribute to job creation, exports, and industrial growth. A PLI scheme for this segment would help achieve these objectives.
On Increasing Capex And Decreasing Borrowing
Sixth, as private sector investment is still narrow and not broad-based, there is a strong case for the government to continue increasing capex. The government has the option to increase the outlay from the current level of Rs 11.11 lakh crore, given the surplus received from the RBI. However, there may be limited capacity in terms of available projects in roads and railways; so the increase would be marginal.
Seventh, with the fiscal deficit being lowered, the government's overall borrowing could also come down. The question is whether this will be reflected in lower market borrowings or small savings. The latter is more expensive, while the former will help ease liquidity in the system. This is something the market will watch closely, as it will affect bond yields, already influenced by the JP Morgan effect.
Lastly, the revenue expenditure will also be of interest. While the interim budget kept most social welfare schemes pegged to either the budgeted or revised numbers of FY24 (whichever was higher), there could be some adjustments based on election promises. The decisions made by the government in these areas will be of interest. The fact that the economy is doing well gives comfort to the Finance Minister, as there are no immediate challenges to address.
The market will hence be looking for direction regarding both taxation and the fiscal deficit, as well as market borrowings.
(The author is the chief economist, Bank of Baroda)
Disclaimer: These are the personal opinions of the author
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