The detail is in the signals

So what does the budget signal in terms of takeaways?

First, the budget strives to ensure that deficits and debt are on a sustainable path and at the same time achieve a sensible balance between persistent tending to the recovery and shoring up fiscal health. The most redeeming part is that the government has surprised positively on fiscal rectitude despite impending general elections, and not just promising future adjustments. The Centre’s fiscal deficit narrowed from 6.4% of GDP in FY23 to 5.8% in FY24 as against a target of 5.9% but is expected to go down sharply to 5.1% in FY25. A concomitant effect is the shrinking of the revenue and primary deficits in FY25 by around 80 bps each which points to the recovering fiscal health of the economy.

An important question that follows is - How has this reduction in fiscal deficit come about? The interim budget reveals that it is largely a result of expenditure compression. Remarkably, the government has managed to keep expenditure growth in check even in a pre-election year. In FY24, total expenditure was budgeted to grow by 7.5% but in the revised estimate it is shown growing lower at 7%. More importantly, revenue expenditure growth has been even more tepid at just 2.5%, way lower than the nominal GDP growth. This is likely to continue in FY25 too with total expenditure budgeted to grow at 6% in FY25, almost half of the assumed tax revenue growth.

Second, the government is likely to meet its FY24 gross and net market borrowing targets of ₹15.4 trillion and ₹11.8 trillion, respectively. In FY25, the government will lower its gross borrowings marginally to ₹14.1 trillion and net borrowing to ₹11.7 trillion. This is a very prudent move as the borrowings have had to be kept in check as India’s public debt ratio, at 83% of GDP, is higher than all other non-G7 major G20 economies. Such high public debt can be a source of macroeconomic vulnerability in today’s turbulent world. Moreover, higher debt and interest payments also constrain government spending.

Third, the key test for any Budget is ultimately the credibility of its fiscal arithmetic. In FY25, it is even more critical as India’s inclusion in the global bond indices will prompt greater scrutiny of the Budget numbers. Here the assumptions of nominal GDP growth rate of 10.5% and tax revenue growth of around 12% seem conservative and there could be positive surprises. However, we must understand that the numbers and assumptions can undergo a revision during the full Budget to be presented sometime in July.

Fourth, the government also stayed committed to its supply-side orientation by re-emphasizing its commitment to capex-led growth with Capex growth of 17% YoY given that FY24 numbers reveal that the government will fall short of achieving its ₹10 trn mark by a good ₹500 bn. Why is the focus on capex critical? Because on the demand side, stronger government capex spending has supported economic activity amid the backdrop of tight monetary conditions and tough global environment. 

The budget has also proposed three railway corridor programmes -- for energy, mineral and cement. This will decongest the high-traffic corridors and help in improving the operations of passenger trains. Together with dedicated freight corridors and port connectivity, these economic corridors will accelerate growth and reduce logistic costs. The interim budget has also bet big on tourism and spiritual tourism and proposed to enhance infrastructure and connectivity to facilitate tourism on islands, including Lakshadweep.

Lastly, the government has chosen to provide targeted support and direct activity in productive areas that will enhance the efficiency of the economy. The outlay on PLI schemes has also been increased from ₹4,645 crores to ₹6,200 crores. The allocation for the Modified Programme for Development of Semiconductor and Display manufacturing ecosystem has been more than doubled to ₹6,903 crores. A new scheme will be launched for strengthening deep-tech technologies for defence purposes while raising the defence capital outlay by 9.4% to ₹1.7 lakh crores.

The budget also enhances focus on affordable housing with funding for low-cost housing projects. It has sought to boost green energy investments via a new scheme for bio-gas manufacturing. The government has also tried to spruce up Nari Shakti with its ‘Lakhpati Didi’ scheme that encourages women to start micro-enterprises and by training women in self-help groups.

(Sachchidanand Shukla is group chief economist, L&T. Views personal)