The most striking aspect of the interim Budget for FY25, presented by Finance Minister Nirmala Sitharaman on Thursday, is its accent on fiscal consolidation and the absence of populist flourishes that one might have expected with general elections due in summer. The interim Budget lays out the macroeconomic roadmap that industry and financial sector players can expect in the event of the Modi government returning to power.

The focus on capital expenditure for infrastructure, robust tax collections (amidst modest targets) and welfare schemes for the ‘youth, poor, women and farmers’ has been a trademark feature of recent Budgets, and this one is no different. However, there is no mistaking the accent on fiscal belt-tightening after the inevitable departure from fiscal targets in the Covid years. While the fiscal deficit for FY24 is pegged at 5.8 per cent this year, slightly better than the projection of 5.9 per cent , it is expected to be down to 5.1 per cent in FY25 and 4.5 per cent in FY26. The decline is more than what most had anticipated, as a result of which the bond markets are celebrating with yields dropping sharply. In absolute terms, the fiscal deficit is down by nearly ₹50,000 crore over current year’s revised estimates to ₹16.8-lakh crore, and nearly double that over FY24 Budget estimates. The reasons are not far to seek. An expected 14 per cent increase in interest costs to nearly ₹12-lakh crore in FY25, about 25 per cent of the total budget, cannot be sustained as it will edge out fiscal space. The 5.1 per cent target is expected to be achieved by keeping the overall increase in government expenditure to 6 per cent from ₹44.9-lakh crore this fiscal to ₹47.7-lakh crore, while net tax revenue is expected to rise more than 12 per cent (a tax buoyancy of about 1.2 which is reasonable) to ₹26-lakh crore. However, capital expenditure has been raised by 17 per cent over the revised estimates for this fiscal of ₹9.5-lakh crore to ₹11.1-lakh crore. As a proportion of the size of the Budget, this remains quite the same as FY24, or about 22-23 per cent. The capex accent of the Budget becomes clear from the fact that about about 57 per cent of the rise in gross budgetary support (₹1.6-lakh crore out of ₹2.7-lakh crore) is accounted by it.

This could be the architecture of future Budgets if the government returns to power. If one takes a decadal view of this government’s finances, it shows that the taxes to GDP ratio has risen from 10 per cent in FY15 to 11.6 per cent in FY24, clearly marking tax reform successes, formalisation and more revenue-led fiscal management. Welfare delivery, thanks to technology via the Aadhaar and mobile linkage, has brought about another paradigm shift in fiscal policy. As the Finance Minister said, savings in welfare deliveries through Jan Dhan Yojana have created fiscal space. This, along with improved tax buoyancy over the years, has created more room for capex and welfare spending. From a wider perspective, the Centre over the years has focused on creating entrepreneurs, whether it is in the IT sector, farming, or among the poorer folk generally. The skilling initiatives and credit schemes are tailored to this end. It is its unstated approach to the jobs question.

The outlays give an indication of focus areas: energy, urban development and rural development are key sectors. An oilseeds mission is expected, of which earlier Budgets had provided some indication. It is not clear whether the expected reduction in fertilizer subsidy can materialise. A rooftop solar route to providing 300 units of free power seems like a better way to go, compared to providing free power from non-renewables, but it will face implementation challenges. The same holds true for rural demand creation through PM Awaas Yojana.

A corpus for IT start-ups and the promise of healthcare benefits to women, besides creating medical colleges, stood out in a speech with more references to the middle class than in recent years – a segment that has seen its disposable income shrink under inflation pressure. For all its accent on inclusiveness, it was surprising that there was no direct reference to pockets of distress in rainfed regions. An increase in PM Kisan instalments was expected, but perhaps the government refrained over inflation fears. Other interesting statements of intent with some political overtones included a package for the ‘eastern region’ to take it a growth driver. This was finally a workmanlike Budget, notwithstanding signs of weaknesses in rural demand in a poor agriculture year.