Budget 2024: No significant changes likely in policy priorities, says Emkay

The upcoming Union Budget for FY25, to be released on 23rd July, faces a complex backdrop characterised by weaker political capital, uneven economic growth, tepid consumption, and subdued private sector investment. Some market segments anticipate a relaxation in fiscal consolidation, with expectations of a shift towards revenue expenditure over capex.

However, in a recent note, brokerage house Emkay said that it foresees no significant changes in policy priorities.

Policymakers are likely to continue signaling fiscal consolidation both in the short and medium term, maintaining a similar policy direction as the interim budget. Despite limited fiscal space and high public debt, the focus on infra-led growth is expected to persist, it said. Emkay further noted that mild deviations from recent budgets may occur, but without compromising medium-term goals. Potential personal income tax-slab adjustments could also boost supply-side economics, added the brokerage.

Fiscal Outlook for FY25

For FY25, the gross fiscal deficit (GFD) is expected to stabilise at 5.1 percent, following a tightening of 0.8 percentage points in FY24. This suggests that an additional 0.5 percent consolidation would be needed to reach the 4.5 percent target by FY26, aligning with the fiscal glide path, it noted. It further expects the government to leverage the fiscal buffer from the RBI’s excess dividend of 0.4 percent of GDP, along with a rollover of ₹1.7 lakh crore in cash balances from previous fiscal savings, and an improved tax profile. These resources will likely be directed towards enhancing welfare and rural spending, which have been significantly affected by past consolidations. Although income-tax cuts for lower income groups might be considered, the focus is expected to remain on rural spending due to its higher marginal propensity to consume, believes Emkay.

The brokerage further observed that the new budget is set to follow a backdrop where the government has surpassed its gross fiscal deficit (GFD) target for FY24P, achieving 5.6 percent of GDP compared to the revised estimate of 5.8 percent and the budget estimate of 5.9 percent. This improvement was driven by robust tax revenues last year.

Steady Consolidation Amid Political and Economic Pressures

As per the brokerage, the forthcoming budget is poised to address a range of issues, from political challenges to uneven economic growth. The effective fiscal impulse has been notably negative, impacting growth, yet both the Centre and States have exceeded their FY24 fiscal targets. This reflects the delicate balance between fostering growth recovery and managing limited fiscal space amidst challenging debt dynamics. Despite these constraints, the Centre is expected to continue on its path of fiscal consolidation. The policy direction will likely focus on credible and well-communicated consolidation strategies, underpinned by improved revenue mobilisation and spending efficiency. Even though spending proportions might increase compared to the interim budget, significant policy shifts are not anticipated, stated Emkay.

Capital Expenditure and Revenue

According to Emkay, the capital expenditure (capex) to GDP ratio is projected to rise to 3.5 percent, representing a 1.7 percentage point increase from pre-pandemic levels. Capex growth is anticipated to be around 20 percent, with significant investments in infrastructure, housing, and rural/urban development. The revenue expenditure (revex) ratio, excluding interest payments, is expected to increase to 7.7 percent, with an emphasis on welfare, rural support, housing interest subsidies, and micro, small, and medium enterprises (MSMEs). Allocations for health and education are also anticipated to rise, supporting future human capital development. The capex/revex ratio is expected to remain stable, noted the brokerage.

Tax and Borrowing Outlook

Emkay also expects the gross tax revenue to GDP is likely to hold steady at 11.6 percent, benefiting from robust tax compliance and a stable tax base. While no major changes in tax mobilisation are expected, there could be some minor adjustments to personal tax rates for lower income earners. Divestment targets are expected to remain unchanged from the Interim Budget. Net market borrowings for FY25 are projected at approximately ₹11.4 lakh crore, slightly lower than the Interim Budget forecast. Reliance on small savings will continue, and excess cash surpluses may help reduce net short-term borrowing. A modest reduction in dated borrowings might occur in the latter half of FY25, it added.

The upcoming budget will be a crucial indicator of the government’s policy direction amidst a challenging economic and political landscape. While significant policy changes are unlikely, the focus will remain on maintaining a steady consolidation path, supported by strategic investments in rural and welfare sectors. The budget will balance the need for fiscal discipline with efforts to boost growth potential through increased capital expenditure and targeted welfare spending.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.