With the results of the general elections behind us, the focus has now expectedly shifted to the full budget for FY2025, which is widely anticipated to be presented in July 2024. Several tailwinds on the revenue account have emerged since the presentation of the Interim Budget, indicating comfort on the fiscal front.
The Government of India’s (GoI) gross tax revenue exceeded the Revised Estimates (RE) of ₹34.4 trillion for FY2024 by ₹276 billion, as per the provisional data released by the Controller General of Accounts (CGA). This overshooting implies that the growth in the FY2025 Interim Budget Estimates (IBE) is quite modest at 10.6%, mildly trailing our projection of nominal GDP of 10.8% for the fiscal. Hence, we believe that there is scope to target higher tax revenues in FY2025 relative to that estimated in the Interim Budget. We conservatively estimate net tax revenues to exceed the IBE by ~ ₹200 billion.
A much larger tailwind stems from the RBI’s unexpectedly large dividend payout of ₹2.1 trillion to the GoI, as against the IBE of ₹1.0 trillion pegged for dividends from the RBI, nationalised banks and financial institutions put together. This implies an upside of at least ₹1.0 trillion, and would lead to a sharp upward revision in the estimates for non-tax revenues in the final budget vis-à-vis the IBE.
Together, these additional tax and non-tax receipts would provide a leeway of ~ ₹1.2 trillion to the GoI for enhancing its expenditures or a sharper fiscal consolidation than what was pencilled in in the Interim Budget for FY2025 or both. The mix between the two would be eagerly watched.
We believe that if the GoI enhances its capital expenditure target of ₹11.1 trillion for FY2025, it may be difficult to achieve on two counts. First, the GoI’s capex growth is likely to have been muted in Q1 FY2025, with project execution slowing amid the general elections and the Model Code of Conduct, notwithstanding the robust expansion that was witnessed in the first month of the quarter. Further, the capex numbers are typically low in the monsoon months, thereby suggesting that the required monthly run-rate in the second half of FY2025 would be quite sharp. This would make it challenging to even achieve the IBE for the fiscal.
Besides, the GoI had allocated a fairly large amount of ₹0.7 trillion for ‘new schemes’ under the finance ministry capex in the FY2025 IBE, which accounts for a bulk of the ₹1.6 trillion expansion in the aggregate capex over the FY2024 levels. With the details of this scheme not provided, this is likely to have been a placeholder entry to show a double-digit expansion in the capex in the IBE. This amount is now likely to be distributed between the various ministries, thereby enhancing their respective capex numbers, while keeping the aggregate number unchanged.
Revenue spending underwent a modest increase in FY2024, with lower subsidies and better targeting providing a cushion. There is a distinct possibility of higher expenditure on the revenue side, either to bring in a new scheme or to increase the outlay for some of the existing schemes. We expect the additional revex to be rural-focused, given the tepid rural demand owing to the spillovers of the inadequate and uneven monsoon that was seen in 2023. The size of this increment in the revex would determine the extent of the additional fiscal consolidation that would be possible vis-à-vis the IBE.
A 50:50 split of the incremental receipts of ₹1.2 trillion, i.e. ₹600 billion for higher revex and an equal amount for cutting back the fiscal deficit, would push up the growth in the GoI’s non-interest non-subsidy revex mildly to 6.3% from the 3.3% in the FY2025 IBE over the FY2024 provisional actuals. This would be much higher than the average growth of 1.7% seen in this metric over the last two years.
Such a split would aid in reducing the GoI’s fiscal deficit to 5.0% of GDP as against the target of 5.1% of GDP in the IBE. A smaller fiscal deficit target would likely imply lower G-sec issuances in H2 FY2025, compared to what was anticipated after the Interim Budget for FY2025 was presented, thereby auguring well for G-sec yields and borrowing costs.
Overall, the fiscal dynamics and the demand-supply balance for G-secs appears to be quite favourable in the current fiscal. However, incremental fiscal consolidation beyond FY2025 is expected to be quite challenging, unless there are favourable developments on the revenue front. The GoI’s fresh medium-term fiscal term targets would provide greater clarity on the fiscal goals and the speed of consolidation beyond FY2026.
Aditi Nayar is chief economist and head of research and outreach at Icra
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Published: 29 Jun 2024, 07:40 AM IST