Budget Math: Countdown to vote on account for budget begins. Will #Budget2024 meet fiscal deficit target for FY24?
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00:00 on February 1st, 2024.
00:02 And the reason, of course, that it's an interim budget
00:05 is because we're also days away from the general elections,
00:09 post which the newly appointed government
00:12 will present a full budget.
00:14 Now, despite that, it does not take away
00:16 from the criticality of the interim budget.
00:19 A couple of things we're closely going to be watching out for
00:23 in the interim budget is first, of course,
00:25 the fiscal deficit.
00:27 Now, for FY24, the government had set a target
00:31 of 5.9% of the GDP for the fiscal deficit,
00:36 and it's likely to reach that target.
00:39 What we need to be looking out for, of course,
00:41 is what the trajectory is from here on
00:44 for the government's fiscal consolidation path.
00:47 Now, we have a target of 4.5% for FY26,
00:52 so it's likely that the target for FY25
00:55 is likely to be somewhere midway,
00:58 at about 5.2% of the GDP or at 5.3%.
01:03 Another parameter we're going to be watching out for closely
01:06 is the government's spending on capital expenditure.
01:10 The government is expected to continue
01:13 with its thrust on CAPEX,
01:15 but we'll also watch out for whether it's able to maintain
01:19 the pace of growth that we've seen
01:21 in the last couple of years.
01:23 But for this and a lot more,
01:25 we're joined by our panel comprising Kaushik Das,
01:28 Chief Economist at Deutsche Bank,
01:30 Rahul Bajoria, Chief India Economist at Barclays,
01:34 and Auradip Nandi, India Economist at Nomura.
01:37 Let's hear it from the experts.
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01:42 To begin with, Kaushik, I would like to start with you.
01:53 What's the budget map for the ongoing fiscal looking like?
01:57 We have seen CAPEX stronger in the first half of the year.
02:02 Subsidy spending has been a little more
02:06 than was earlier being anticipated,
02:09 but more or less we seem to be in line
02:12 to meet the fiscal deficit target for the year.
02:15 What's your takeaway?
02:16 Yeah, thanks.
02:18 You know, the budget numbers for this year
02:20 is supposed to be in line,
02:23 so the fiscal deficit target that the government has given
02:25 at 5.9% of GDP, we think that that will be met.
02:30 Obviously, there will be revised estimates presented,
02:33 you know, which is gonna be different
02:34 from the budget estimate.
02:36 But if you look at the different pluses and minuses,
02:39 there are many things on the revenue side
02:41 where they will be upside.
02:42 For example, the dividend that the government of India
02:46 got from RBI that was higher than the budget estimate,
02:49 tax collection in some components are running higher
02:53 than what you'd have expected.
02:55 So I would say that it's kind of not too difficult
03:00 to meet the 5.9% fiscal deficit target,
03:03 and that will form the base then to calculate
03:05 for next year's fiscal arithmetic FY25.
03:09 What I think is the capital expenditure target
03:13 that they've given, close to 10 trillion INR,
03:17 it'll probably come closer to that,
03:19 probably 9, 9.5 trillion would be spent.
03:21 There would be some bit of, you know,
03:24 amount which may not be spent,
03:26 and that may be used to balance the other spending
03:29 that is required for subsidies, as you mentioned.
03:32 But then overall, I don't see it as a big challenge
03:35 for the government to meet this fiscal deficit target.
03:37 Growth has been stronger than what we expected.
03:40 Yes, we know that the nominal GDP growth
03:43 will be lower at about 8.9%
03:45 compared to the 10.5% budget estimate.
03:48 But I think that's not going to be a challenge
03:50 if you look at the tax collection numbers
03:52 that are running pretty in line with the target
03:55 or even higher in some components.
03:57 So I'm pretty confident that the 5.9% target will be met.
04:00 And then we can discuss about the FY25,
04:02 what our expectations are.
04:04 - All right.
04:05 So Rahul, coming to you,
04:06 do you broadly stand in agreement with that?
04:08 And are you also expecting fiscal deficit for this year
04:11 to come in at 5.9%?
04:14 Or is there a little bit of a chance
04:17 for it to be somewhat, of course, in that range,
04:19 but maybe at maybe a 5.8%?
04:22 - I think there's an element of false precision.
04:26 If we say it's 5.8, 5.9,
04:28 I think broadly they are basically the same number.
04:31 I think as Kaushik rightly said that,
04:34 the government appears to be very comfortably placed
04:37 as far as the fiscal arithmetic is concerned,
04:40 despite having front-loaded spending quite a bit,
04:43 especially on the CapEx side.
04:45 We have not really seen any significant widening
04:49 in just the rolling trends around the deficit.
04:52 And given additional dividend payments from the RBI,
04:56 it looks like that there will be savings,
04:58 at least on the fertilizer side,
05:01 despite the fact that there's been variability
05:03 in farming activity.
05:06 There seems to be reasonable amount of consolidation bias,
05:10 which is very much visible both in communication
05:13 and in terms of ability to do that consolidation.
05:17 So I think all eyes will be on what is the extent
05:20 of consolidation that can be done for next year, right?
05:23 So fiscal year 25, and if they do set a target,
05:27 which is a tad bit more aggressive, say 5.2%,
05:30 I think that will be a fairly aggressive statement
05:33 from the government about its intent
05:35 to undertake fiscal consolidation.
05:37 We are looking slightly at a lower number, 5.3%,
05:41 which we think is more realistic.
05:43 But then if we do end up seeing a bit more faster pace
05:47 of consolidation next year,
05:49 then it would probably underline the commitment
05:51 to kind of reduce the fiscal deficit
05:54 at a time when growth is good.
05:55 So the need for counter-cyclical fiscal policy
05:58 to turn a little bit more restrictive will kick in, right?
06:01 And that builds fiscal space for the coming years.
06:05 - Okay.
06:07 So, you know, given that, of course,
06:10 the focus remains on the fiscal consolidation path
06:14 going forward, whether or not we will be able
06:18 to meet a fiscal deficit target of about 4.5% by FY26,
06:23 and how much will that require us to cut back on
06:27 in the next fiscal?
06:29 What's it looking like?
06:30 Do you think that we will see maybe less aggressive growth
06:35 on the capex front?
06:37 What's it looking like?
06:38 - Well, I mean, so I think you make a very important point
06:43 that the fiscal consolidation that will happen
06:46 in the next budget will be contingent on how serious
06:49 the government is about the medium-term fiscal target,
06:53 which is actually no longer that medium term anymore,
06:56 because it just comes two years later.
06:58 So if the government is looking at 4.5% of GDP,
07:01 you need to achieve around 5.2, 5.3% of GDP
07:07 by next year, ideally.
07:09 Now, one thing to remember is that the government
07:13 really ramped up capex this year,
07:16 probably as a percentage of GDP
07:19 to sort of multi-year highs.
07:23 And it's not necessary that, you know,
07:27 every year you hike REVX by 30, 35%.
07:33 I mean, even if they hike by 15 to 20%,
07:37 as a percentage of GDP,
07:40 capex actually still remains elevated.
07:43 The other thing to also consider is, you know,
07:45 you'll have elections in the middle of the year.
07:48 And then after that, you know,
07:50 your spending will start post-elections.
07:53 So there's also the question of, you know,
07:55 you need to, how much spend you can do in the overall year.
08:00 So I think that, so there is a signature statement
08:05 the government has made in the current budget of FY24
08:10 saying that, look, we are really committed to capex.
08:12 We've kept it at a really high level.
08:14 I think that broad direction is still going to be there
08:19 in FY25.
08:20 So capex, I think, is going to remain strong.
08:24 REVX, I think, is going to be interesting
08:26 because even in FY24,
08:29 the government's budget was a very economical
08:33 1.4% growth or so.
08:35 And I think what we are tracking is around 3.5 or 3.6%,
08:40 and which is very understandable.
08:42 We were very skeptical at the start of the year
08:44 when we saw such economical numbers.
08:46 Now, the other question that comes in is, you know,
08:49 we've got elections coming up,
08:50 what kind of things they announce
08:54 in terms of sort of poll promises.
08:58 Even if they do announce certain things,
09:01 probably the bigger impact of that
09:03 will come in forthcoming budgets
09:05 because, you know, there's just a small element
09:08 of what you're going to be spending now.
09:10 So I think on the REVX side,
09:12 it'll be interesting to monitor what they're doing.
09:15 On the revenue side,
09:18 especially for the taxation bit of it,
09:21 I mean, look, direct taxes,
09:23 it's been, it's not only a six,
09:26 it's a ball that's sort of gone across the stadium this year.
09:31 I mean, it's growing at almost higher
09:35 than more than two times the rate of nominal GDP growth,
09:38 which is not usual.
09:40 I mean, usually direct taxes grow
09:42 by around similar growth rates as the nominal GDP growth.
09:46 So another, I think, will be very interesting to watch
09:49 is what kind of assumptions they make
09:51 on the direct taxes side,
09:53 and also, of course, on the indirect taxes side,
09:56 you know, how buoyant do they see tax revenues next year?
10:01 In terms of nominal GDP growth,
10:03 we expect it to be around 10.5% or so
10:07 compared to 8.9% this year.
10:09 So that should offer some more cushion on that front.
10:13 So at this point, 5.2, 5.3% of GDP is very much doable.
10:18 It depends on what their priorities are.
10:23 - Okay, all right.
10:24 So Kaushik, what is your expectation?
10:27 What's the nominal GDP growth that you're pencilling in
10:32 for FY25?
10:33 And we have seen, like you've mentioned,
10:36 on some fronts, robust tax collections.
10:39 Do you expect that trend to continue into FY25 as well?
10:43 - Yeah, so we are assuming the starting point
10:46 of any fiscal calculation is the nominal GDP growth.
10:49 So we are assuming that the government
10:51 will kind of use 11% growth, nominal GDP growth
10:55 to do the collections, to do all these calculations.
10:58 So the tax collection also would be more or less
11:01 in line with the 11% growth around those levels.
11:05 Now, certain components of tax could be on the higher side
11:10 or lower side, depending on how they're kind of performed
11:13 in FY24, but overall, you should get about 11% tax collection
11:18 which should be pretty good.
11:20 These investments have not performed that well last year,
11:24 but then these things take time.
11:25 So we might be lucky in FY25
11:28 and you could get those disinvestments happening.
11:30 So that could help.
11:31 Non-tax revenue has been stronger last year.
11:35 This year also, the government may get more dividend
11:38 from the government, from RBI.
11:40 So that can also help.
11:42 I think on the expenditure side, capital expenditure
11:45 would be to the tune of 11 trillion
11:48 compared to 10 trillion last year.
11:49 So that would be about 16% growth, which would be good.
11:53 Whereas revenue expenditure would be brought down further
11:56 because during COVID times,
11:58 the expenditure already increased.
12:00 The base is very high, so there is space to remove,
12:03 reduce that revenue expenditure.
12:05 So that probably would be shown at 3, 4% or 5% growth,
12:08 whereas the capital expenditure would be 16, 17% growth.
12:12 So overall, expenditure would be about 7, 8% growth
12:15 at the maximum, which would be lower
12:18 than the nominal GDP growth.
12:20 Therefore, as a percentage of GDP,
12:21 the expenditure side would be reducing.
12:25 Whereas on the revenue side, as a percentage of GDP,
12:28 that probably would be increasing to around 9.4%.
12:31 And therefore, you could easily get to the 5.5%
12:34 or 5.3% fiscal deficit target for this year.
12:37 And then you need to do just 75 basis points consolidation
12:40 in FY26 to get down to 4.5%.
12:44 So I think it's quite possible.
12:46 India's growth has held up much better
12:48 than anybody would have anticipated.
12:50 And when you have the support of growth looking good,
12:53 and the quality of fiscal spending
12:55 has improved quite significantly,
12:57 that's something to note.
12:59 We look at a ratio called revenue deficit
13:01 to fiscal deficit that has come down quite significantly
13:04 from the peak in 2021.
13:06 The lower the ratio, the better.
13:08 So the quality of fiscal spending
13:10 has improved quite significantly
13:11 with the government pushing capital expenditure more
13:14 and cutting revenue expenditure as much as they can.
13:16 The only risk is if something goes wrong globally,
13:19 geopolitically, and that leads to oil prices going up,
13:23 or some kind of problem which requires government support
13:26 at any point of time,
13:27 nobody can forecast all this at this stage.
13:29 But otherwise, assuming a normal monsoon this year,
13:33 not too much problem on the geopolitical side,
13:35 I think we could get down to the 5.25% or 5.3%
13:39 fiscal deficit target for FY25,
13:42 with the quality of fiscal spending remaining good,
13:45 the boost on capital expenditure continuing,
13:48 which could then lead to the private sector capex
13:51 also improving and increasing much more
13:53 in a broad-based manner after the elections are over.
13:56 So that could also support growth.
13:57 And India could be in a cycle of three, four years
14:02 of very strong growth in this cycle,
14:04 supported both by public investment and private investment.
14:08 - Okay, so before we can continue with that discussion,
14:11 we need to slip into a short break,
14:13 but stay tuned, we'll be right back.
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17:23 - Welcome back, you're watching NDTV Profit.
17:34 I'm in conversation with Kaushik Das, Rahul Bajoria,
17:37 and Auradip Nandy.
17:39 Now, Rahul, we've been talking about an aggressive,
17:43 but achievable FY25 fiscal deficit target.
17:47 You know, given all of that,
17:49 what do you think the government's
17:50 key spending priorities will be?
17:52 And I especially do want to ask you about rural spending.
17:56 So we've seen mixed trends coming in from the rural areas.
18:01 Consumption, private consumption
18:03 has also remained tepid this year.
18:05 Do you think the government is going to be focusing
18:09 on that specifically,
18:11 and might need to announce more schemes or subsidies
18:15 for providing more comfort to rural specifically?
18:18 - Yeah, so I think, you know,
18:21 it has been an ongoing process of kind of adding
18:24 to the welfare schemes, you know,
18:26 both targeted at rural and also at the urban poor, right?
18:30 I mean, the cash transfer programs.
18:32 And I think we must acknowledge the role of the states
18:34 as well, you know, which have introduced
18:36 a lot of new schemes,
18:37 particularly in the last couple of years,
18:39 kind of leveraging the public digital infrastructure,
18:43 you know, to sort of increase the welfare net in some ways,
18:47 and kind of, you know,
18:48 particularly targeted towards women in the rural area.
18:51 So I think that particular thrust
18:53 is going to be pretty visible, you know,
18:55 so a potential increase in the transfers, you know,
18:59 to particularly to women farmers,
19:02 the government may kind of consider, you know,
19:04 sort of holding the fertilizer subsidies
19:07 and the food subsidies at, you know,
19:09 a reasonably large level,
19:10 even though they were rationalized last year.
19:12 I think this year, we should see modest increase
19:14 in both the numbers.
19:16 At the same time, you know,
19:18 they have introduced schemes, you know,
19:20 targeted towards the tribals, you know,
19:22 in a few states, you know, from a housing standpoint.
19:25 So I think there is a very clear bias
19:27 towards supporting consumption and supporting income,
19:31 you know, which is largely towards the rural areas.
19:34 Could there be anything over and above this?
19:37 I think, you know, it is possible that, you know,
19:40 a very large part of the CAPEX spending program
19:43 could be diverted towards railway infrastructure, right?
19:46 Which typically would tend to improve
19:48 or, you know, benefit in an outsized manner,
19:51 the rural and the semi-urban areas of the country
19:54 in terms of better connectivity
19:56 and, you know, kind of faster connectivity.
19:57 And so, you know, that also should be taken into account
20:00 when we think of rural spending,
20:01 that it's not just provisioning of welfare and income support,
20:05 but also provisioning on infrastructure,
20:07 which is going to have an impact on the rural
20:10 and the semi-urban population of the country.
20:12 All right.
20:13 Auradip, what have you been making of the rural sector so far?
20:17 Do you think there are signs of recovery
20:19 and do you think more needs to be done?
20:21 If so, you know, picking up from where Rahul left,
20:25 what are your expectations in terms of any schemes
20:28 or targeted measures the government may announce
20:31 for the rural sector?
20:33 So, look, the rural, you know, economy has been
20:38 sort of performing below its potential.
20:42 The terms of trade, while they have improved,
20:46 are still not at sort of historically good levels.
20:53 So on the rural side, there is weakness
20:57 and we are seeing that also in a lot of the high frequency
21:00 growth indicators that one looks at.
21:03 And the part of it is also because we've had
21:06 very erratic monsoons.
21:08 I mean, the first advance estimates of Kharif crops
21:11 suggest that there's likely to be a drop in Kharif production
21:15 this year vis-a-vis last year.
21:17 So, you know, there is certainly concern on the rural side.
21:23 The positive side of all of this is that we are looking
21:27 at lower inflation levels next year vis-a-vis last year
21:31 and higher inflation has eaten into people's incomes.
21:35 Currently, we are seeing a trajectory of lower headline
21:38 inflation and headline inflation possibly converging
21:42 to core inflation at around four and a half-ish levels.
21:46 So that's the positive side of it.
21:49 But there's certainly concern on the rural side.
21:51 Now, the question, of course, is what can the government
21:55 do about it?
21:56 And again, we need to understand that this is also
22:00 an interim budget.
22:01 We cannot treat this as a budget where huge announcements
22:05 come through.
22:07 So I completely take Raoul's point,
22:10 which is that there is going to be focus
22:15 on targeted infrastructure.
22:19 There's-- the government already has an income support scheme
22:23 for farmers.
22:25 There's crop insurance.
22:27 There is MGNREGA.
22:29 I mean, that's one figure that everyone looks at
22:32 is how much allocation they're going
22:35 to give to the rural employment guarantee scheme.
22:39 So I mean, they don't need to necessarily put
22:42 in extra pipelines.
22:43 The pipelines are all there.
22:45 If they like, they can just put more money
22:48 through those funnels.
22:50 So I think it's going to be one of the spending priorities.
22:55 I think there are other priorities also.
22:57 There's-- you need to push consumption.
23:01 You need to push infrastructure.
23:03 You need to push manufacturing.
23:04 But on the agri side, I think that they
23:07 have the existing mechanisms.
23:09 The question is how much outlay they sort of push
23:13 through into these pipes.
23:17 OK, all right.
23:17 So moving on, Kaushik, I do want to ask you
23:20 about the impact of India's inclusion in the bond indices.
23:23 And what do you expect government borrowings
23:26 to look like in the coming fiscal?
23:30 So the bond index inclusion, obviously,
23:32 is a very positive news.
23:33 It is supposed to start from June end.
23:36 And we are expecting about $25 billion debt inflows
23:40 to come into India by the end of March 25.
23:43 So FY25, we'll see a lot of inflows
23:46 coming into India from the offshore debt community.
23:48 And that will also help improve the demand supply
23:52 dynamic of bonds.
23:54 The supply of bonds from the central government side,
23:57 I think we had about $15.4 trillion
24:00 INR worth of gross market borrowing last year.
24:03 It would be slightly lower than that this year,
24:07 because fiscal deficit would be reduced.
24:09 And even after factoring in the redemption net market
24:13 borrowing, the calculations that we have,
24:15 we think it would be slightly lower than the $15.4 trillion
24:19 INR worth of gross market borrowing that we saw last year.
24:22 And then on top of that, the demand side
24:24 of those bonds, who would want to buy those bonds,
24:27 obviously, that improves, because the offshore community
24:31 would be buying these bonds because of bond index
24:34 inclusion.
24:35 So what will happen because of this index inclusion
24:37 is that over a period of time, and even
24:40 starting from the next fiscal year, the cost of capital
24:43 would be reducing.
24:44 And the pressure on Indian banks to buy
24:47 that many bonds on the margin would reduce,
24:50 or even on the RBI to buy bonds and support the market
24:53 would reduce, because there will be a new set of investors who
24:56 would be very keen to buy Indian government bonds.
24:59 So that's a very good development
25:01 for the fiscal side.
25:02 It reduces the cost of capital.
25:04 Interest rates would come down.
25:06 That itself could be positive for the private sector
25:08 to increase their capex and not get crowded out.
25:11 So bond index inclusion is a very, very positive kind
25:15 of development that has happened.
25:18 And remember, this is just the JP Morgan bond index.
25:21 It could happen that by the end of this year,
25:24 we could have more announcements about other bond
25:26 indices like Barclays Bloomberg aggregate, which
25:29 could also include India.
25:31 Therefore, in 2025, you could have another $25, $30 billion
25:35 coming into India.
25:36 So I think the story that India is presenting
25:39 is that India is doing exceptionally well compared
25:43 to what we are seeing in other parts of the world.
25:46 The growth metrics are looking good.
25:47 Fiscal metrics are looking good.
25:49 All across the world, people are showing interest
25:51 to be part of India's capital markets,
25:54 whether it is equity or bond.
25:56 And given that the bond market has opened up now
25:58 and will open up even more, you would
26:01 see a lot of inflows into India starting
26:03 in the next fiscal year.
26:05 All right.
26:05 So picking up from that, Rahul, one last question
26:08 before we let you go.
26:10 So can we still expect government borrowings
26:12 to remain elevated?
26:14 Is there any estimate you currently
26:17 have in mind for what government borrowings are looking like?
26:20 Also, to close, what I do want to ask
26:23 is that the last interim budget that we
26:26 saw presented by this government pretty much turned out
26:30 to be into more of a full-fledged budget
26:33 with the kind of announcements and the nature
26:35 of some of those announcements that had come in.
26:37 Do you think there's any scope for surprises on that front
26:41 this time as well?
26:43 So I think taking the second question first,
26:46 I think the budget will be a statement of intent.
26:49 It will try to provide a direction in terms
26:52 of what this government, if re-elected,
26:54 would try to do in the next couple of years.
26:57 What is the broader direction of fiscal consolidation?
26:59 What is the priorities as far as spending is concerned,
27:03 both in infra and in terms of the welfare schemes?
27:06 So I would look for some narrative setting
27:08 to be done, even in the garb of an interim budget.
27:11 And that will get followed on in the full budget
27:15 in the month of July.
27:17 In terms of the gross borrowing itself,
27:19 I think $15.5 trillion INR is what we are looking at,
27:22 so slightly above what Kaushik has in mind.
27:24 But I would say that a number, whether it's large or small,
27:28 is a function of demand.
27:29 And we have seen bonds being in reasonably good demand,
27:35 and that's reflected in the yields.
27:37 And you have visibility of flows,
27:39 whether it was, say, insurance sector last year,
27:42 this year it could be the foreign portfolio investors.
27:46 There's obviously reasonably strong growth in deposits.
27:50 So there are factors which will support yields.
27:53 You could also see the RBI starting to ease monetary policy
27:56 at the margin.
27:57 We expect the first cuts to come through from the June MPC
28:00 meeting now.
28:01 And so from that perspective, I think
28:03 there will be a reasonable amount of demand,
28:05 both in terms of quantum and in terms of duration, which
28:10 should provide a fair amount of support to the fixed income
28:13 side of the market this particular year.
28:17 Well, we're running out of time, and we'll
28:19 have to close on that note.
28:21 But thank you so very much for taking time out.
28:24 We'll stay in touch with you over the next few days
28:26 for your thoughts and views on the budget.
28:29 Thank you so much.
28:31 Stay tuned to NDTV Profit as we continue our pre-budget
28:35 and post-budget coverage.
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