Interim Budget – A Glimpse of things to come…

The Interim Budget or the Vote-on-Account presented by the Finance Minister, reflects a significant amount of continuity, and the commitment to continue with several welfare measures benefitting the diverse strata of society, especially the poor, youth, women, and farmers.

The projected government borrowing program for FY25 is lower than the FY24 numbers. The gross borrowing is placed at Rs. 14.13 Lakh Crs. This is as against the budgeted gross borrowing for FY24 at 15.43 Lakh Crs, and Rs.14.41 Lakh Crs raised so far in FY24. The net borrowing which was budgeted for FY24 was 11.80 Lakh Crs, and an actual borrowing to the tune of Rs.10 Lakh Crs. so far in FY24. The net borrowing is for FY25 is lower at Rs. 11.75 Lakh Crs. This augurs well for the bond market and also for liquidity conditions. This is significant in an economy which has limited capital resources as this leaves more resources for the private sector.

Yet another factor to be considered is the projected fiscal deficit for FY25 at 5.10%. This is a substantial reduction from the 5.80% projected for FY24. The dividend receipts from the RBI and publics sector enterprises is held at Rs.1.50 lakh Crs. This will go a long way in impressing upon external investors on the smooth pathway to fiscal prudence and discipline. Apart from dividends, the buoyancy in tax receipts both in direct and indirect taxes, is also a factor that will lend immense support to the exchequer in the coming year. Tax reforms have led to deepening and widening of tax base.

The government or public capex is placed at Rs.11.11 lakh Crs. for FY25. This is higher by 11.10% from the FY24 capex of Rs.10.01 lakh Crs., and it is 3.40% of GDP. The defence spends remains the same. This is important from the impetus that it can give to private capex and downstream capacity building over time. This also scaffolds the investment cycle that is facilitating growth and expansion at present.

There were not too many expectations attributed to the announcement as this was an interim budget. As discussed above, the market participants were more keen on gauging the continuity of policy and the announcements have not disappointed on that front. The thrust continues to be on infrastructure development and enhancing the quality of expenditure by focusing on capital expenditure.

While the equity markets gave a relatively lukewarm response and would now shift focus to the final budget; the debt market was where the excitement was. The better-than-expected fiscal deficit numbers, as a percentage of GDP, for both FY24 and FY25 led to a sharp rally in market yields. The yield for benchmark 10-year government security eased from 7.12% to 7.06%. Gilt Funds as an ideal investment avenue, in the current environment of high interest rates, was highlighted in our note titled “FinSights – Gilt Funds Nov.6 ’23”. With inflationary pressures largely under control and now the risks of excess supply abating as well, gilt funds continue to be an attractive investment opportunity.

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