Flush with money, on whom will the Finance Minister shower her largesse in the budget?

With the Union Budget around the corner, the biggest question doing the rounds is whether Finance Minister Nirmala Sitharaman will give up the fiscal deficit ghost?

This is the first budget under a coalition government and the dominant view is that Sitharaman is compelled to beat the populist drum both to shore up ailing private consumption, especially in rural areas, and regain confidence and trust among voters, who seemed to have read the government a riot act in the recent general elections.

From across the board tax reliefs to individuals and small businesses to additional expenditure on various welfare programmes covering youth, farmers and women, several proposals are being discussed as likely budget sops. None other than a member of the Prime Minister’s Economic Advisory Council has telegraphed the signal to simplify and reduce the tax burden, while industry bodies and policy thinktanks suggest that now is not the time to stand in attention, but act.

But everything needs money and luckily for the government, the revenue math is with them. Thanks to the rather generous dividend from the RBI and higher-than-budgeted tax collections, Sitharaman, who commands the nation’s largest wallet, might as well indulge in some much-needed fiscal therapy. The upshot is that the government, which has been doggedly pursuing fiscal consolidation, need not miss a beat even if it decides to splurge.

Economists, who analyzed the available fiscal space to absorb potential spending increases and revenue losses, believe that the FY25 fiscal deficit target of 5.1% of GDP will likely be retained in the upcoming budget. Some are even pegging deficit at 4.9% for FY25, despite an increase in overall expenditure.

For FY24, the Centre had initially projected a fiscal deficit target of 5.9% of the GDP and later revised it to 5.8%. But thanks to expenditure rationalization and better revenue collections, it eventually settled at 5.6%. The interim budget pegged FY25 target at 5.1% of GDP, and the market is keenly watching on how Sitharaman will move the needle from here.

According to Anubhuti Sahay, Head, India Economic Research, Standard Chartered Bank, India, revenue slippage is likely to increase to 0.23% of GDP as against the interim budget estimates if some of the discussed tax cuts are announced. She added that the proposed tax cuts may not increase slippage from the budgeted FY25 revenue targets.

Two areas where the expenditure burden will likely increase include crop procurement to rebuild food grains stock and farmers income support. Both these measures could see additional expenditure of 0.2% of GDP, according to Sahay’s estimates. Likewise, brokerage Motilal Oswal noted that even if the instalments under the PM-Kisan programme are increased by 50% to Rs 9,000 per annum, it would cost the exchequer an additional Rs 30,000 crore, which could be easily financed from the RBI dividend.

The RBI handed over Rs 1 lakh crore (0.4% of GDP) excess dividend than originally budgeted in February, which Motilal Oswal suggests should be sliced into smaller portions that can fund multiple things. For instance, a chunk of Rs 30,000 crore to Rs 40,000 crore could be used to reduce the deficit to 5% or thereabouts, while another Rs 40,000 crore to Rs 50,000 crore could be spent for taxpayer reliefs, while another lot of Rs 30,000 crore could finance farmer support programmes.

Lastly, the government could even spend additional resources to provide more capex-related loans to states, improving the Centre’s total capital spending (including loans and advances). The Centre budgeted Rs 1.4 lakh crore to states and union territories as loans and advances in the interim budget, which could be increased by Rs 30,000 crore to Rs 40,000 crore.

Another helpful factor, according to Sahay, is that the government has less time to spend the budgeted capex and might see associated expenditure savings.

Above all, the Centre’s gross market borrowings may decline to Rs 13.58 lakh crore in FY25 from Rs 14.13 lakh crore in the interim budget, according to India Ratings & Research. Similarly, net market borrowings are expected to reduce to Rs 11.20 lakh crore from Rs 11.75 lakh crore. As the fiscal deficit and borrowings appear achievable, Ind-Ra expects the FY25 full budget to have a favourable impact on interest rates.

Lower borrowings, along with the inclusion in JP Morgan’s Government Bond Index-Emerging Markets, the 10-year G-sec yield will likely see some correction to 6.8% this fiscal. This will not only help the government to borrow at lower costs, but also lower the capital market borrowing cost for corporates, banks and other financial institutions.

On balance, the Centre’s fiscal consolidation path is unlikely to be moved to the burning deck. Rather, it may marginally lower the deficit target by a few basis points and remain close to the 5% mark, notwithstanding the expected increase in allocations and possibly a few tax changes.