Fiscal deficit target for FY24 is lower than budgeted at 5.8% of GDP versus 5.9% BE – despite revenue expenditure over-runs and lower nominal GDP growth this year.
Lower fiscal deficit achieved due to strong tax collections and support from RBI & PSU dividends. Moreover, the cut back on capital expenditure to the tune of INR 50,000 crores also provided support. Fiscal consolidation continues with a target of 5.1% of GDP for FY25. Capex target set at INR 11.1 lakh crore with 47% spending slated for roads, railways and highways. On the receipts side, tax to GDP ratio remains high at 11.7% of GDP in FY25, with further support from healthy RBI and PSU dividends. Achieving the disinvestment target remains a challenge (government missed the FY24 target as well). On the other hand, assumptions on GST collections seem conservative and could overshoot.
Major scheme outlays show higher growth in allocations for social welfare schemes including education and health. Although schemes like PM-Kisan and MNREGA did not see any change in allocations for FY25 compared to this fiscal. On the financing side, with a compression in the fiscal deficit, the government set a lower gross borrowing target for FY25 at INR 14.1 lakh crore. This year’s target remains unchanged. However, short-term borrowings have been reduced for FY24 to account for the lower than budgeted fiscal deficit (INR 17.35 lakh crores in FY24 RE versus INR 17.87 lakh crores budgeted).
Bond yield: Lower than expected market borrowings supported bond market sentiments with the 10-year yield falling by 9-10bps post the budget announcement to 7.05%. We expect the 10-year yield to move below 7% over the coming months and see a range of 6.7-7.0% by H1 FY25 – supported by expectations of a rate cut by the RBI, lower US bond yields, stabilising inflation prints, and debt flows on account of the inclusion in the JP Morgan bond index.