Govt may strike a balance between fiscal deficit, capex and social spending

The Union Budget, which is to be tabled on July 23, would be crucial as it marks the first full year budget of NDA 3.0. It will lay the foundation for the country’s economic, infrastructure and social development for the next decade. One can hope that the government would strike a balance between fiscal deficit, capex for growth and social spending. The continuation of existing capex agenda including infrastructure, railways, defence, renewable/clean energy, higher budgetary allocation to revive rural economy, job creation and roadmap for ‘Viksit Bharat’ by 2047, as per JM Financials, would be the key themes for the Union Budget. Markets would be keen to see if there are any adverse changes in the capital gain tax on equities. In case there is no change, it would be considered as a positive for Indian equity markets as first and foremost, it will continue to adhere to the path of fiscal consolidation, without compromising on the quality of expenditure.

A BoB economic research expects 10-30 bps reduction in the fiscal deficit target to 4.9-5.1 per cent. Given the extra fiscal room available with the government from additional Rs. one lakh crore surplus from RBI, one can expect announcements to boost consumption, saving and investment. If the budget assumes GDP level for FY25 to be at the level of Rs. 327.7 lakh crore as per the Interim Budget, the implicit GDP growth rate would be 11 per cent. However, if the forecast of growth is increased to 11.5 per cent, then the GDP would be Rs. 329.3 lakh crore, which would then offer more space for fiscal deficit. This combined space will vary from Rs. 1-2.6 lakh crore depending on the forecast made for GDP growth. These savings can be used for lowering the fiscal deficit target, making allowances for higher expenditure, lower collections on disinvestment or loss of revenue due to tax concessions. The Centre may focus on adherence to fiscal prudence and continue on the fiscal consolidation path while at the same time refraining from obsessing over the fiscal stance, with FD estimated around 4.9 per cent in FY25 budget as per SBI projections.

This is because it may come in the way of long-term sustainable growth path, by striking the right balance by limiting the consolidation to 20 bps this fiscal. The estimated decline in both gross and net market borrowings of GoI in FY25 should also come as an enabler for the GoI’s glide path for fiscal prudence/consolidation. Parity on taxation front for bank deposits vis-à-vis other investment avenues, as per Ecowrap, is an immediate need, given the shifting preference of select cohorts of investors to alternate asset classes, whose returns have been trumping bank deposits. Even if Goldman Sachs report also sees some expenditure allocation towards welfare spending as it may not require a reduction in capex given the higher than expected dividend transfer from the RBI.