Will prudence win over populism in Budget 2025?

India Budget : Indian economy has showed remarkable resilience in post pandemic period. Despite several external headwinds, it achieved an average annual growth rate of 8.3% in the last three years supported by a positive base effect owing to the contraction registered in the FY20-21. This was made possible the significant pump priming through high capital expenditure ( capex ) spending by the Government. However, with the tapering off of the favourable base effect combined with challenges emanating from weak consumption growth, household indebtedness, high food inflation, slow growth in capital formation and stress among MSMEs, India faces significant challenges in continuing with the growth momentum. Budget with ET India's aviation sector has wings, but airlines can't fly high Change the game of trade as Trump returns to US throne Income tax payers' wishlist: More benefits in new tax regime, higher HRA & more The first advance estimate of GDP for 2024-25 has signalled this with the growth estimate lowered to 6.4%. The external front is also not looking promising given the rising trade and geopolitical tensions. Given these domestic and external economic headwinds, The Finance Minister is faced with the challenge of balancing the continued need to pump prime the economy to boost consumption while being worried about the inflationary impacts of the same and need to adhere to the fiscal prudence roadmap. Given this context, we have attempted to undertake projections for the liley fiscal outcome for FY25 and possible headroom for fiscal manoeuvring available with the Government. Our projections for some of the key fiscal metrics are as follows: Fiscal Outlook for FY2024-25: Tax Revenue: Our analysis projects a net tax revenue of INR 25.4 trillion for FY25, which is 1.7% lower than the FY25 budget estimate (BE). Our key assumptions underlying this is same Tax/GDP ratio as used in the Union Budget 2024 (11.77%) applied to the first advance estimate of nominal GDP for FY25. The state's share of tax revenue has been estimated using its long-term average growth. Non-Tax Revenue: We have estimated non-tax revenue to exceed the FY25 BE by 7.4%, based on its proportional collection until November 2024. Non-debt capital receipts: We expect the Government's non-debt capital receipts to be 45% lower than the FY25 BE, mainly due to slow progress on the disinvestment front as evidenced from low ‘miscellaneous capital receipts’ until November 2024. This is understandable as there was no pressure on the government given the fiscal position. Total non-debt receipts: Based on these estimates, the total non-debt receipts of the Government are expected to be INR 31.7 trillion, 1% lower than the FY25 BE. Revenue expenditure: We expect revenue expenditure to be INR 37.7 trillion, which is 1.5% higher than the FY25 BE, mainly due to higher proportional spending until November 2024 and lower net cash outgo under the first tranche of supplementary demands for grants. Capital Expenditure: While the Government ramped up capex in Q2, it was still 12% lower for April-November 2024 compared to the same period in 2023 and has only reached 46% of the budgeted value during this period. Assuming proportional utilization as last year, the capex can be INR 8.3 trillion in FY25. However, the Government can utilize capex budget towards capitalization of public sector enterprises or building/recouping provisions. We expect the Government capex would be in the range of INR 9 to 9.5 trillion for FY25. Fiscal deficit: Based on our estimates of Government receipts and expenditure, we expect the revised estimates of fiscal deficit for FY25 to be pegged between 4.6% to 4.8% of GDP. Fiscal outlook for FY26: Tax revenue: For FY26, we expect the Tax/GDP ratio estimates to improve to 12% due to progressive improvements in tax efficiency. Assuming a nominal GDP growth of 10.5% for FY26 and the state's share of central taxes growing as per long-term trend, the Government's net tax revenue is expected to be INR 28.7 trillion, 13% higher than FY24. Non-tax revenue: For dividends and profits part of non-tax revenue, we expect a 5% budgeted growth given the high base. For other non-tax revenue components, we expect a 10% budgeted growth, giving a total non-tax revenue of INR 6.3 trillion (7% growth). Non-debt capital receipts: We have estimated non-debt capital receipts to be 0.81 tn , with miscellaneous capital receipts assumed as INR 0.5 trillion (same as last year) and 0.31 tn as recoveries of loans and advances (assuming 10% growth). Total non-debt receipts: The above estimates would take the total budgeted non-debt receipts of the Government to INR 35.8 trillion, a 12.9% rise over FY24 expected receipts. Revenue Expenditure: On the expenditure side, we expect revenue expenditure estimate to be increased by 5-8%, with Government avoiding urge to announce any new significant populist scheme involving direct transfers to beneficiaries. The existing schemes will be continued. Capital expenditure: We expect that Government will adhere to the fiscal roadmap and peg the fiscal deficit at 4.5% of GDP for FY25. This will provide a capex headroom of INR 11.2 – 12.3 trillion. Thus, we can expect capex growth of 1% - 11% in FY26 over the FY25 BE, bringing the capex to GDP ratio in the range of 3.1% - 3.4% of GDP. However, as the capex utilisation during FY25 is likely to be below budgeted level, the capex growth for FY26 BE over FY25 RE will come out to be at optically significant rate range of 18% - 37%. Given the fiscal maths and the imperative to allow the headroom to the Monetary Policy Committee to cut rates by not stoking inflation, the Union Budget 2025 is likely to be a fiscally prudent one. The Government has a very small headroom of about INR 90k crore (3 percentage point in revenue expenditure) to provide some tax sops at lower end of income tax slabs or small increases in the amount of cash transfers to the farmers could be done that can be funded from the savings being achieved in its administration by plugging leakages in the scheme. 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Given the past trends and this being the second budget of the Government, we expect fiscal prudence to win over populism in Budget FY25. The Finance Minister will lean on the monetary policy support to fire the private capex having played her part by adhering to the fiscal consolidation mantra. (The author is Partner and Leader Economic Advisory, PwC India) (You can now subscribe to our Economic Times WhatsApp channel )