The FY25 “vote on account” Budget delivered strongly on all three broad expectations: fiscal consolidation (deficit at 5.14% of GDP in FY25 BE vs 5.85% in FY24 RE), restrained spending and reduction in gross borrowing by using the GST compensation cess.
This leaves another 60 bps of consolidation left for the 4.5% fiscal deficit target for FY26, which should be relatively easy to achieve and bodes well for bond market stability.
The FY25 “vote on account” Budget delivered strongly on all three broad expectations: fiscal consolidation (deficit at 5.14% of GDP in FY25 BE vs 5.85% in FY24 RE), restrained spending and reduction in gross borrowing by using the GST compensation cess.
The Budget has assumed a nominal GDP growth of 10.5% for BE FY25, which seems realistic compared to the first advance estimate for FY24 RE GDP of 8.9%.
Total expenditure growth is budgeted at 6.1% y-o-y in FY25 compared to 7.1% for FY24 RE. Revenue expenditure in FY24-25 is higher by about 3.2% compared to 2.5% for FY24 RE.
While headline capex has jumped to 3.4% of GDP in FY25 BE from 3.2% in FY24 RE, total capex (including PSU capex) at 4.4% of GDP is lower than the pre-pandemic (FY17-20) four-year average of 4.7% of GDP, thereby imparting a lower growth impulse.
The gross market borrowing for FY25 pegged at ₹14.1 trillion, well below consensus expectations, meaningfully positive from a demand-supply perspective.
1)Revenue Assumptions
a. Tax revenue: The Budget has assumed a nominal GDP growth of 10.5% for BE FY25, which
seems realistic compared to the first advance estimate for FY24 RE GDP of 8.9%.
The tax collection growth is assumed lower at 11.5% compared to 12.5% for FY24 RE
despite a higher nominal GDP growth base. Income tax collection is mainly expected to
witness incrementally slower growth at 13.1% compared to 22.7% for FY24 RE.
For GST, the Government has budgeted 10.7 trillion (FY24 RE: 9.6 trillion), implying
growth largely in line with nominal GDP and a monthly run rate of 1.8 trillion,
approximately.
b. Non-Tax revenue: Receipts from dividends and profits have been assumed at 1.5 trillion
compared to 1.54 trillion for FY24 RE with dividends from the RBI and financial institutions
assumed on similar lines for FY25 BE at 1.02 trillion.
The higher revenue estimate also appears to be factoring Telecom receipts, which have
increased to 1.2 trillion vs 935 billion last year. This includes receipts against capital
infusion in BSNL of 829 billion for FY25 compared to 648 billion in FY24 RE.
2) Expenditure Assumptions
Total expenditure growth is budgeted at 6.1% y-o-y in FY25 compared to 7.1% for FY24 RE.
Revenue expenditure in FY24-25 is higher by about 3.2% compared to 2.5% for FY24 RE.
Allocation to flagship welfare schemes is mainly unchanged.
While headline capex has jumped to 3.4% of GDP in FY25 BE from 3.2% in FY24 RE, total
capex (including PSU capex) at 4.4% of GDP is lower than the pre-pandemic (FY17-20)
four-year average of 4.7% of GDP, thereby imparting a lower growth impulse. However, the
capex assumptions look more realistic and should not witness material downward revision.
Interest-free bonds to states for capex were maintained at 1.3 trillion in FY25.
3) Financing of Deficit
The gross market borrowing for FY25 has been pegged at 14.1 trillion compared to 15.4
trillion for FY24 RE as the Government adjusted 1.23 trillion of maturities against the GST
compensation fund. The net market borrowing has been assumed at 11.75 trillion compared
to 11.8 trillion for FY24 RE. The gross market borrowing number was well below consensus
expectations, which were around 15-15.2 trillion. This is meaningfully positive from a
demand-supply perspective especially in the light of $20 billion expected inflows due to index
inclusion.
Events have been turning incrementally favorable for fixed income investors as central banks
look to pause and pivot towards monetary easing. The fading of the post-pandemic pent-up
growth on the lagged impact of global monetary tightening and fiscal consolidation has
started to reflect in concurrent growth indicators.
From the bond market perspective, the Budget has been constructive with its strong
commitment to fiscal consolidation as well as pragmatic usage of GST compensation to
reduce market borrowing thereby further improving the already positive demand-supply
dynamics.
With the Budget behind us, the next event to look forward to will be the RBI Policy on February
8, 2024. Market participants are closely watching whether RBI shifts its stance to “neutral”,
which could be largely read by the market participants as the first step towards easing liquidity
conditions and as a first precursor to monetary easing. Any disappointment on the change in
stance may lead to temporary volatility but does not change the core view that the next major
step from global central banks, including the RBI, should be towards monetary easing. The
magnitude of which, however, may vary within central banks depending on the respective
output gaps and distance from inflation targets.
Given the expected drop in global inflationary pressures as well as growth momentum in
FY25, we believe the action of easing matters more than the timing. We believe investors
should be looking at strategies that are largely data dependent and respectful of the macro
backdrop. The tight banking system liquidity and uncertainty on a possible “welfare oriented –
election year budget” had kept the bond market rangebound.
With the Budget out of the way and liquidity expected to ease on Government spending and
FX inflows, we believe current valuations are compelling for patient investors to experience
high accrual as well as the possibility of participating in capital gains as the rate cycle turns.
Investors with more than 12 months investment horizon can consider allocation towards
moderate duration (one-to-four year) categories.
We recommend low duration and money market categories for investors with less than 12
months investment horizon and limited appetite for volatility as money market products should
also benefit from expected changes in RBI’s policy stance along with rate cuts.
The thrust on infrastructure development continued with the Budget outlay on capex increasing
by 16.9% to 11.11 trillion up by 16.9% on FY24 RE and 11.1% on FY24 BE which is 3.4% of
GDP.
- Railways infra to focus on three major economic railway corridors (a) energy, mineral and
cement corridors (b) port connectivity corridors and (c) high traffic density corridors. - Railway rolling stock – 40,000 normal rail bogies are proposed to be converted to Vande
Bharat standards enhancing safety and convenience. - Water supply allocation of 700 billion to national rural water supply scheme.
- Defence capex allocation increased by 9.4% at 1.57 trillion over FY24 RE.
- Road capex is proposed at 2.72 trillion.
- The allocation has been increased by 63.7% at 128.5 billion over FY24 RE. This increase is
led by allocation to green hydrogen mission and grid connected solar. - The government will provide subsidies to 10 million households for setting up rooftop solar
which could generate 300 units of power per month. - Viability gap for setting up 1 GW offshore wind. Also, the compressed biogas will be blended
with the CNG in a phased manner.
- FAME II has been extended to FY25 with the allocation of 26.7 billion as against 48.1
billion in FY24 RE. - Greater adoption of e-buses for public transport networks will be encouraged through
payment security mechanisms. Also, PM e-Bus seva scheme allocation is at 13 billion as
against 200 million FY24 RE. - Plans to expand and strengthen the e-vehicle ecosystem by supporting manufacturing and
charging infrastructure. - Production Linked Incentive (PLI) scheme for Automobiles and components allocation is at
35 billion as against 4.8 billion FY24 RE. - PLI scheme for advanced chemistry cell battery storage allocation at 2.5 billion as against
120 million in FY24.
- Pradhan Mantri Awas Yojana (PMAY): The PM Awas Yojana Grameen (Rural Affordable
Housing Scheme) will target two crore homes in the next five years with an allocation of 807
billion. - Continued focus on Jal Jeevan Mission with allocation of over 700 billion.
Implementation of three major economic railway corridor programmes (Energy, mineral and
cement; Port connectivity; High traffic density) under PM Gati Shakti would
a) enable multi-model connectivity
b) improve logistics efficiency
c) reduce cost
Production Linked Incentive (PLI) allocation for the sector increased to 21 billion as compared
to 17 billion FY24 RE
- The capital support to oil marketing companies (OMCs) for investment in the new energy
space has been reduced from 300 billion to NIL for FY24 RE. Provision of 150 billion has
been made for FY25 BE. - Emphasis on natural gas import reduction through coal gasification and liquefaction
capacity of 100 MT is targeted to be set up by 2030. This may also help in reducing imports
of natural gas, methanol, and ammonia.
- Cigarettes: No incremental tax hikes were announced on cigarettes on the back of a benign
tax hike announced last year. - Rural Consumption: The outlay on Mahatma Gandhi National Rural Employment Guarantee
Program is at 860 billion as compared to 600 billion FY24 BE which may aid in demand
recovery in the rural segment.
- Implementation of three major railway corridor programmes under PM Gati Shakti to
improve logistics efficiency and reduce cost. This could aid the cost curve for miners/ mills. - No change in duty structure for either end products or key raw Material inputs for ferrous or
non-ferrous. - An increase in total capital expenditure would result in improved demand for the metal
sector.
Fertilizer subsidy at 1.68 trillion has been brought down by 13% as compared to FY24 RE.
The subsidy provisioning is lower in line with the lower raw material prices.
GDP – Gross Domestic Product; RE – Revised Estimates; BE – Budget Estimates; FX – Foreign Exchange
Source: Budget documents. The information in this document is provided for information purposes only.
