1. It highlights the government’s thought process and lays out a path for the future 2. If the same government returns, then it will be difficult for the same set of people to present a different budget and 3. February 2019 (interim budget) vs July’19 (final budget) experience shows that very little was changed between the two budgets.
Sharper fiscal consolidation…
FY25interim budget is fiscally much tighter than market expectations, which is remarkable, given the pressures of the upcoming elections. As against the market expectation of 5.3% of GDP as the fiscal deficit target for FY25, the government presented a fiscally more prudent budget, with a target of 5.1%. The finance minister also mentioned that the FY26 target is lower than 4.5%. The word ‘lower’ is a new addition which implies that FY26 budget could be even tighter.
In the February’19 budget, the government had introduced Pradhan Mantri Kisan Samman Nidhi Yojana under which, the government distributed ₹6,000 to every farmer in 3 equal installments every year.
In fact, the first tranche of ₹2,000 was distributed before the 2019 Assembly elections.
The expectations were ripe that something similar could happen in this budget as well. But the government surprised everyone with no new social scheme announced or expanded. In fact, the government’s revenue expenditure (a good proxy for total social spend) excluding interest payments is slated to decline by 1% Y-o-Y in FY25. Allocation for some of the popular social schemes like MNREGA, Jal Jeevan Mission etc remains unchanged for FY25. This also possibly reflects the government’s confidence in re-election.
…with a clear preference for capex
The single biggest positive from the budget is the government’s unwavering focus on getting the investment cycle going. A 16% jump in the government capex (primarily on infrastructure projects) programme will go a long-way in boosting investor confidence that the government is focusing on the right things from the long-term perspective.
The railway and the road capex jump is seemingly low at 3% and 2% respectively but the government has kept aside ₹705bn (US$8.5bn) for some ‘new schemes’ details of which would be shared probably in the July budget. This could include low interest financing for R&D projects to promote entrepreneurship or urban housing scheme among other things which will likely have a multiplier impact.
Opening the doors for interest rates to come down
Low fiscal deficit implies that the government’s borrowing programme will decline by 8.5% year-on-year into the next year. This is a great news for the yields to go down.
G-sec yields (10-year) declined by 12 bps today to 7.06%. Corporate cost of borrowing should also go down. The tight fiscal also increases the possibility of policy rate cuts by the RBI and 50bps rate cut in 2HCY24 looks more likely now. The expectation around some rural boost in the budget was not met but then one can not have the cake and eat it too.