- Boost for Jobs: Of the multiple long-term challenges, the central focus of this budget has been on creation of employment and addressing the associated issues like skill formation. The measures announced try and address both the supply and demand side of the employment equation — more simply there is a push towards creating more jobs (demand) while simultaneously improving the skill of the labour force (supply). The government’s efforts to reap India’s demographic dividend are visible in its push towards labour intensive production, its skilling initiative, incentivising formal job creation and increasing participation of women in the workforce. The budget estimates that these measures will help create 8 million jobs per year — which is in line with the employment requirement (absorb the number of workers to be added each year) that has been set out in the economic survey.
- Consumption boost: Measures like the change in the income tax slabs and the direct benefit transfer to first time workers, is likely to spur consumption, particularly for small ticket items. The budget’s policy mix – including continued capex, job creation, support for manufacturing and agriculture– is likely to be positive for India’s potential growth. We estimate real GDP growth for FY25 at 7.1%.
- Fiscal consolidation continues: The budget reduced the fiscal deficit target from 5.1% of GDP in the interim budget to 4.9% for FY25. The budget projects higher revenue receipts (primarily due to additional RBI & PSU dividends) to the tune of 0.4% of GDP in FY25 compared to the interim budget. Half of this additional fiscal space has been used for fiscal consolidation (20 bps) and the other half has been deployed for additional revenue expenditures (excluding subsidy and interest payments). The FM’s speech also mentioned the governments’ resolve to lower the fiscal deficit target below 4.5% of GDP in FY26 and thereafter the fiscal trajectory is likely to be supportive of keeping India’s debt on a sustainable path.
- Revenue receipts assumptions seem conservative and could see further upside: The budget has set a higher revenue receipts target of INR 31.3 lakh crore for FY25, an increase of 14.7% from FY24 and as compared to INR 30 lakh crore set in FY25 IE. Gross Tax-to-GDP ratio is expected to pick-up to 11.8% in FY25 BE from 11.6% in FY24. The budget relies on continued healthy collections in both direct taxes and RBI & PSU dividends. Despite the higher receipts target, collections could see a further upside as – 1) the budget assumes nominal GDP growth of 10.5% for FY25 BE, compared to our estimate of 11.1%, 2) GST collection target also seem conservative based on the current monthly run-rate. The changes in indirect (custom duty changes) and direct taxes (income tax slab change, corporate tax change, gain from capital gain tax) announced in the budget are unlikely to lead to a significant revenue loss on a net basis.
- No compromise on the capex strategy: The allocation towards asset creation remains unchanged at the interim budget’s estimate of Rs 11.1 lakh crore and accounts for 3.4% of GDP. However, the mix of this capex across sectors has seen some change. For instance, interest free capex loans to states have increased while allocation to the petroleum ministry has declined. In terms of schemes, the allocations for agriculture, housing, urban development (smart cities & metro projects), National Health Mission and education have seen a marginal increase from the interim budget.
- Transfer to States: Quite predictably, the finance minister, has had to make overtures towards the states run by its coalition partners. Both Bihar and Andhra Pradesh have had their fair share of allocation either directly or through soft loans from multilateral agencies that the centre will help service. The total transfer to states is projected to increase by INR 74,439 crore from the interim budget. This accounts for both higher tax devolution (due to higher total tax receipts) and “other transfers” which includes transfers to states like BH & AP and slightly higher allocation for interest free capex loans (targeted at INR 1.5 lakh crores).
- Bond Market & Borrowings: The details on the financing of the fiscal deficit show that the government plans to reduce its borrowing both through dated securities, short term borrowings and small saving funds while accounting for a higher draw down on its cash balance (INR 1.37 lakh crores) in FY25. The 10-year bond yield rose by 3bps post the budget announcement (close to 6.99% at the time of writing) as the borrowing cut for FY25 was lower than anticipated. Gross market borrowings were reduced only by INR 12,000 crores. Going forward, we expect the 10-year bond yield to inch lower to 6.8-7.0% range by the end of Q2 FY25 and 6.7-6.9% by Dec-2024 end. FII debt flows, lower US yields, and likely rate cut by RBI in Q4 2024 are expected to support domestic yields.
Copyright © 2022 | Business News This Week