It was expected to be a restricted vote on national accounts, but this interim budget, instead, surprised fixed income markets so much so that the yield of India’s benchmark 10-year government security fell by 9 bps. AAA rated 3-year corporate yields declined 10-12 bps as well.
Movements of this magnitude in debt markets, without any shift in monetary policy outlook, is not very common. Government’s commitment to staying on course its financial consolidation roadmap was the key to positively surprising market trends.
Firstly, in FY24, not only did India manage to achieve the highest economic growth on the back of heavy public capex, but it did so with extreme fiscal prudence. Fiscal deficit (% of GDP) for FY24 is estimated to be 5.8%, compared to a target of 5.9%. Consequently, this can release ~Rs 30,000 crores of additional liquidity for corporate borrowers. Secondly, the fiscal deficit target for FY25 has been set at 5.1%, compared to street estimates of 5.3%.
This has enabled the Government to come up with a borrowing plan which is smaller than last year’s. Market borrowing of the Government could shrink 0.5% in FY25 (vs FY24).
All of these have been achieved through a conservative growth in expenditure plan in FY25. Overall expenditure of the government is expected to be 6.1% more than in FY24. This grew 7.1% in FY24. Similarly, public capex has been estimated at Rs 11.1 crore, 11% higher than FY24 (vs a growth of 37% in FY24).
Slower growth in public capex at a time when funding needs for infrastructural projects are escalating, reflects the Government’s bet on a revival in private capex in FY25. It is a judicious decision to gradually lower public expenses to attain fiscal prudence.
This strategy can serve two purposes -- crowding out of private borrowers will be lesser and sovereign rating agencies will take comfort from India’s commitment towards lowering fiscal deficit, which may culminate into a rating upgrade from BBB- to BBB.
However, these eventualities are contingent upon a revival of private capex, which itself is dependent on declining borrowing costs and ebbing geopolitical volatilities. While the later is beyond our control, the former can be reasonably influenced by the RBI though a timely shift in its monetary policy outlook.
Overall, the interim budget was as restrictive in its communication as expected, and we should get more clarity on some of the long-term developmental targets discussed today during the full budget sometime in Q2FY25.
Debopam Chaudhuri
Chief Economist at Piramal Enterprises