Since the interim budget in February, the economic and political landscape has shifted. At that time, the BJP government stood on firm political ground, having secured victories in three state assembly elections. There were widespread expectations that Prime Minister Modi would secure a clear mandate for a third term in the general elections.
However, the general election results brought a surprise. The BJP fell short of a majority, leading to the formation of a coalition government at the Centre. While the BJP performed well in urban areas, it faced setbacks in rural constituencies, likely due to ongoing economic challenges in those regions.
Against this backdrop, the full budget for FY25 will be presented on July 23, and it is anticipated to place greater emphasis on rural and lower-income households. Early signs of this shift are already evident, with states like Maharashtra and Telangana rolling out various welfare schemes for the rural population.
While the government is still likely to maintain fiscal prudence, the narrative in the budget is likely to change to more consumption focused rather than capex-focused, said domestic brokerage firm Nuvama Institutional Equities in its latest report.
The central government received an additional dividend exceeding ₹1 trillion. The brokerage suggests that if the government allocates this extra dividend entirely towards enhancing spending in urban and rural areas, it could potentially increase revenue spending (excluding interest and subsidies) by 10% year-on-year.
This contrasts with the interim budget's projected growth of 0–1% based on FY24 Revised Estimates (RE) and 3% based on FY24 provisional actuals.
"If this happens, it may help support consumption at the lower end, but we do not think that would be big enough to materially alter the course of the business cycle (which in our view is slowing). As argued in our recent economy note, India currently faces a demand deficiency owing to the lack of macro-economic recycling," said Nuvama.
Given the anticipated moderation in tax revenue, the finance minister might explore alternative financing sources to boost lower-end spending without compromising capital expenditure. The brokerage has identified three potential approaches, one of which is temporarily pausing fiscal consolidation to raise additional funds to stimulate consumption.
Although the central government's fiscal deficit is still 200 basis points above the pre-COVID target, the aggregate public deficit (including the center, states, and PSUs) is almost back to pre-COVID levels. Moreover, macroeconomic stability remains high due to benign core inflation and a manageable current account deficit. Stalling fiscal consolidation could help address the macroeconomic demand problem.
Another way is to raise funds off-budget through the balance sheets of government entities such as NHAI, Indian Railways, or other PSUs, either through additional borrowing or monetising existing assets.
PSUs have undergone significant consolidation in recent years, and this method could shift some of the burden of reviving domestic demand onto these PSUs without deviating from the Center’s fiscal glide path.
Additionally, the government could significantly increase the disinvestment target, taking advantage of buoyant capital markets and rich valuations, especially for PSUs. Notably, disinvestment has been slow in recent years. This approach could provide a substantial boost to the exchequer's resources, helping to support necessary expenditures without undermining fiscal prudence.
The brokerage highlighted that by exploring these avenues for additional resources, the government could potentially secure around ₹1–1.5 trillion. If these funds are redirected towards consumption, the brokerage anticipates a significant revival in demand at the lower end of the economy.
The media sector is likely to benefit if the government focuses on consumption. Additionally, it will benefit goods companies with significant rural exposure, as increased rural income generally supports overall consumption.
Additionally, the fertiliser sector stands to benefit from these developments. Nuvama anticipates that the government will allocate ₹2 trillion to the agriculture ministry, aimed at expanding flagship schemes focused on income support and crop insurance for farmers.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
