Interim Budget is all about deft fiscal management

Along expected lines, the FY25 Interim Budget underscores policy continuity on the back of India’s economic resilience despite global adversities. In my opinion, there are three key takeaways for the economy.

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Fiscal consolidation surprises pleasantly

The finance minister has tightened purse strings by sticking to the promise of gradual fiscal consolidation. In a surprise move, the FM fine-tuned the target for the FY24 fiscal deficit to 5.8 per cent of GDP from 5.9% earlier. Further, the target for the fiscal deficit has been lowered to 5.1 per cent of GDP in FY25 — better than the consensus expectation of 5.3-5.4 per cent. In my assessment, the consistent delivery of a fiscally responsible budget has been India’s differentiating factor in preserving macro-financial stability in the post-pandemic recovery phase.

Fiscal prudence has its macro advantages. Gross g-sec borrowing by the central government is budgeted for a moderation to ₹14.13-lakh crore in FY25, the lowest in three years. This will free up space for corporate sector borrowings and, more importantly, drive interest rates lower, thereby benefiting the banking and financial sectors at large.

Focus on public capex

The budget carries forward its commitment for driving investments in the economy. Total capex spend is slated to touch 3.4 per cent of GDP in FY25 — the highest in the last two decades. Capex thrust will be riding on higher allocations for the transportation sector, especially railways, which is supposed to benefit from the proposed creation of three major economic corridors under the PM Gati Shakti program. In addition, the focus on green infrastructure will find some fillip with the proposed 100 mt capacity creation for coal gasification and liquefaction, along with the adoption of e-buses for the public transport network. Further, a new scheme would be launched for strengthening deep-tech technologies for defence purposes and expediting ‘atmanirbharta’ along with the creation of five integrated aquaparks.

India’s investment rate has improved from its recent low of 27.3 per cent of GDP in FY21 to 29.8% in FY24, as per the NSO. With a continued thrust on public capex, I believe the investment ratio could increase further to 30-31 per cent in FY25. This will not just provide avenues for credit creation; it will also help ancillary sectors like real estate, MSMEs, hospitality, etc., which have high backward and forward linkages to infrastructure creation.

Microflavour highlights priority focus areas

The government continues to preserve inclusive development with targeted sectoral measures encompassing affordable housing, green energy, and health insurance.

With PM Awas Yojana (Grameen) close to achieving its target of 3 crore houses, the scope has now been extended to another 2 crore houses for the next five years. In addition, the FM promised that the government will soon launch a scheme to help deserving sections of the middle class “living in rented houses, slums, chawls, unauthorised colonies” to buy or build their own houses.

The FM highlighted that 1 crore households will obtain 300 units of free electricity per month through rooftop solarisation. This is expected to generate annualized household savings of ₹15,000-18,000. This dovetails with the PM KUSUM Scheme, which is doing a splendid job of promoting energy security through solar capacity creation in rural areas.

The healthcare coverage under the Ayushman Bharat scheme will be extended to all ASHA workers, Anganwadi workers, and helpers.

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I believe the micro-emphasis on affordable housing and its integration with the green energy objective is a masterstroke and a win-win for all stakeholders. This could get chiselled further if the government incentivizes female home ownership. The housing credit to GDP ratio, which is expected to touch a new high of 8.7 per cent in FY24, could see further gains in FY25 amidst new launches and upward movement in home prices in recent quarters.

Setting the stage for 7-in-7

In the near term, I expect the spirit of fiscal prudence with a targeted focus on job-creating sectors (like housing, MSMEs, etc.) to get further policy attention in the FY25 final budget, which could get tabled later in June or July 2024.

From an investor perspective, the FY25 Interim Budget has maintained the government’s focus on high-quality growth, an attractive feature for equity investors, while pleasantly surprising the extent of fiscal consolidation and market borrowing, something that debt investors are going to love. This will boost investor sentiment while strengthening the foundation for a structurally higher growth trajectory — this, in my opinion, will take India to a 7 trillion dollar economy in 7 years.

The author is the Founder, MD and CEO of AU Small Finance Bank

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