Budget expectations: Rising tax revenues and cuts in current expenditure will help the central government set a fiscal deficit target of 5.3% of GDP in FY25, HSBC said on Tuesday.
“Tax revenues could remain buoyant in FY25, growing faster than nominal GDP growth (11.9% gross tax revenue growth vs. 10.6% nominal GDP growth). After all, structural benefits, for example, those made possible by digitization and better tax information, likely to benefit for several years,” the economists noted in a report on budget expectations.
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The finance minister, in his last budget, pointed out that the government plans to bring down the fiscal deficit to 4.5% of GDP by FY26.
HSBC further pointed out that the government is also likely to meet the fiscal deficit target of 5.9% set for FY24 on the back of higher tax rate volatility than budgeted despite a higher subsidy.
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“Gross tax revenue buoyancy is likely to come in at 1.6 in FY24 against a budget estimate of 1.0. The reason for this is rapid growth in income tax (29% yoy), corporate tax (20%), and GST revenues (10%). On the basis, tax revenues are 0.4% of GDP higher than budgeted,” the note emphasized.
The economists noted that the government spending less than budgeted on capital expenditures is also likely to help maintain the deficit. According to HSBC, the government is expected to have an outlay of Rs 9 lakh crore against the budgeted Rs 10 lakh crore.
“Meanwhile we expect capital to remain unchanged as a percentage of GDP in FY25. In INR terms, it would be an increase from Rs 9 lakh crore in FY24 to Rs 10 lakh crore in FY25,” it said.
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The likely impact of fiscal consolidation on growth is likely to be limited, HSBC economists noted, while noting that it will lead to RBI tapering in FY25 and delivering two rate hikes of 25 bps each in the June and August policy meetings.
“Inflation could fall below 5% in January and average 4.5% for the next three quarters,” they noted.
Quality of expenditure
The global research firm noted that the quality of government spending has improved over the last year, but revenues are not growing as sharply and cash flows have declined. It noted that the fiscal deficit of states is unlikely to change in the next fiscal.
It projected market borrowing by states much faster than the central government in FY25, as well as in the current fiscal.
“The combined market borrowing of the two in FY25 is likely to grow more slowly than nominal GDP growth (2.1% vs. 10.6% yoy), making the overall borrowing schedule broadly manageable,” it said.