Interim Union Budget FY2024-25: Key Takeaways

Interim Union Budget FY2024-25

Fiscally Prudent budget with focus on Youth, Women, Agri & Poor

• The government sticks to fiscal consolidation path with fiscal deficit as a percentage of GDP for FY25 estimated at 5.1% vs 5.8% for FY24 (RE). Government to pursue a broad path of fiscal consolidation to attain a fiscal deficit lower than 4.5% of GDP by FY 2025-26. Nominal GDP growth rate for FY25 is projected at 10.5%
• Financing of fiscal deficit largely through market borrowing and small saving schemes. Gross market borrowing for FY25 is budgeted at INR 14.13 lac crores vs INR 15.43 lac crores for FY24 Net market borrowing including short-term borrowing for FY25 is budgeted at INR 11.75 lac crores vs INR 11.8 lac crores of FY24 (The 10-year benchmark bond yield moderated by 10 bps attributable to the market borrowing and fiscal deficit target for FY25 coming in lower than the market expectations)
• Net tax revenue at INR 26.01 lac crores is expected to grow at a rate of 10.4% in FY25 as a result of improvement in economic activity, compliance and widening of tax base.
• The total expenditure for FY25 estimated at INR 47.65 lac crores is 6.13% higher than the revised estimate for FY24. Capital expenditure estimated at INR 11.11 lac crores is 16.93% higher than the FY24 revised estimate.
• Share of capital expenditure as a portion of total expenditure has grown to 23.31% in FY25 vs 17.64% for FY23.
• High capital expenditure is driven by higher allocation to road transport and highways, railways, and defence. This signifies government’s trust on infrastructure development which will also help crowd-in private investment.

• Priorities of this budget – People-Centric Inclusive Development
  • Focus areas – Garib Kalyan, Empowering the Youth, Welfare of Farmers & Nari Shakti.
  • Rooftop solarization- 1 crore households will be enabled to obtain up to 300 units of free electricity per month.
  • Implementation of 3 major railway corridor programs under PM Gati Shakti to improve logistical efficiency and reduce cost.
  • Health cover under Ayushman Bharat scheme to be extended to all ASHA, Angawadi workers and helpers.
  • Pradhan Mantri Awas Yojana (Grameen) close to achieving target of 3 crore houses, additional 2 crore targeted for next 5 years.
  • Housing for Middle Class scheme to be launched to promote middle class to buy/built their own houses.
  • Government will promote private and public investment in post-harvest activities.

• Tax proposals
  • Certain tax benefits to start-ups and investments made by sovereign wealth funds/pension funds, tax exemption of some IFSC units earlier expiring on 31.03.2024 extended up to 31.03.2025
  • Withdrawal of outstanding direct tax demand: Expected to benefit approx. 1 crore taxpayers.
    • Up to INR 25,000 pertaining up to FY10.
    • Up to INR 10,000 for FY11-FY15
  • Retention of direct and indirect tax rates (including import duties)
  • A day before the budget, government did announce reduction in import duty from 15% to 10% for mobile phone components,

Given this was a pre-election interim budget, one needs to wait for the full budget to be announced for any direct measures to improve rural consumption demand. Investors’ need to understand the impact of these announcements on various asset classes which in turn will reflect in the performance of their investments in future. Further to our recent investment strategy note, here we state a few points which should be considered while making investments.

• The focus of this year’s budget is to follow fiscal consolidation roadmap while retaining push towards capex. High capital expenditure by the government will help to crown-in private capex. Along with this, higher tax collection numbers with improved compliance & widening tax base should help anchor fiscal deficit target of 4.5% by FY25-26. Also, conservative revenue estimates could expect to get more tax buoyancy. These factors augur well for long-term equity investors.
• Debt market reacted positively as the fiscal deficit budget estimate for FY25 came in lower than the market estimate and so did the government’s G-sec borrowing for FY25. The 10-year benchmark G-sec yield was trading at 7.04%, down 10 bps vs previous day’s close. Focus on fiscal prudence should help bring down the cost of borrowing. Yields offer a decent accrual and a potential participation in capital appreciation with rates expected to come down. Credit spreads have just about started to appear attractive after adjusting for risk, although still low relative to history.
• With equity markets running valuation risk and interest rates around peak of the current cycle, a hybrid or a multi-asset investment strategy is best suited for the current market dynamics.