Quantum Budget View: Fiscal Prudence over Populist Spending

The key highlight of this budget was the government’s commitment to fiscal consolidation. In the budget 2021, the government had set a target to reduce fiscal deficit/GDP to 4.5% by FY 2025-26 from 6.8% in FY 2021-22.

Following this glide path, the government lowered the fiscal deficit/GDP to 5.8% in FY2023-24, below the budget estimate of 5.9%. For the fiscal year 2024-25, the fiscal deficit is pegged at 5.1%, lower than broader expectation of about 5.3%.

Chart – I: Government Sticking to the Fiscal glide path

Fiscal deficit target for FY 24-25 and FY 25-26 are estimated

Government revenue assumptions seem reasonable as the gross tax collection budgeted to grow by only 11.5% YoY in FY25 as against growth of over 12.5% in the last two financial years.

Chart – II: Increased formalisation and improving compliance are supporting Tax Collection

On the expenditure side, the government continues to favor capital spending over revenue expenditure. The proportion of capital expenditure to total increased further to 23.3% in FY25 vs 21.2% in FY24.

Chart – III: Improving expenditure quality with capex boost should enhance growth Multiplier of Government Spending

Compression of revenue expenditure was largely contributed by reduction in fiscal support to low-income groups. Expenditure on subsidies has been coming down consistently over the last 4 years along with expenditure on Income and employment guarantee schemes.

Lower direct fiscal support is bad for consumption especially at the low-income segment. This should ease inflation pressures further and provide enough headroom to RBI to ease monetary policy.

Direct Fiscal Support = Food Subsidy+ Employment Guarantee+ Income Guarantee

Increased government capex along with recent pickup in private sector investments should lead to a multiplier effect in the economy and boost growth over the medium term. However, the sluggish demand recovery and the lack of demand stimulus remain headwinds to the near term growth outlook.

With faster fiscal consolidation, government market borrowing is also budgeted to decrease in FY25. The gross market borrowing is budgeted at Rs. 14.13 trillion in FY25 against Rs. 15.4 trillion in FY24. Given the rising demand for bonds from domestic investors like pension, PF, insurance etc. and India’s inclusion in the global bond index, supply of government bonds in FY25 might fall short of total demand. This will put downward pressure on interest rates going forward.

Bond Market View:

Government’s push for fiscal consolidation and below expectation fiscal deficit and borrowing estimates were cheered by the bond market.

We hold a positive outlook on the fixed income market based on following:

• Favourable demand supply mix in government bonds
• Increasing participation by foreign investors with index inclusion
• Declining Inflation trend
• Possibility of rate cuts by the RBI
• Softening global environment with declining global growth and expectation of rate cuts by major central banks

We expect bond yields to decline over the coming months. With higher starting yield and possibility of decline in bond yields over medium term, return potential of fixed-income funds investing in long duration bonds look good.

Investors can capture this opportunity with dynamic bond funds which are invested in long term bonds.

Fiscal Snapshot

Source – Budget Documents, QuantumInternal Research

Portfolio Positioning

Source – RBI, Quantum Mutual Fund

For any queries directly linked to the insights and data shared in the newsletter, please reach out to the author – Pankaj Pathak, Fund Manager – Fixed Income at [email protected].

For all other queries, please contact Neeraj Kotian – Area Manager, Quantum AMC at [email protected] / [email protected] or call him on Tel: 9833289034

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Above article is authored by Quantum.

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