CareEdge Ratings expects upcoming budget to boost revenue expenditure

The upcoming Union Budget for FY25 is likely to prioritise supporting consumption by increasing revenue expenditure on welfare schemes and agriculture while continuing on the fiscal consolidation path, CareEdge Ratings said on Tuesday.

“We expect FY25 revenue expenditure to grow by 6.8 per cent, higher than budgeted growth of 4.6 per cent, resulting in ~ Rs 750 billion higher allocation compared to the interim budget’s estimate. The government is expected to allocate more towards agriculture, welfare schemes, job creation, and rural housing. Some of the major schemes/ministries that can see higher allocation include MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), PM Awas Yojana, PM Gram Sadak Yojana, PM Kisan Samman Nidhi, and schemes related to labour-intensive MSME sectors,” said Rajani Sinha, chief economist at CareEdge Ratings, in a webinar on Union Budget expectations by the agency.

 

The ratings agency expects the government's focus on manufacturing and capex to continue in the Budget. “The government is likely to retain a capex target for FY25 at Rs 11.1 trillion. CPSE (Central Public Sector Enterprises) capex has contracted over the past few years. However, the FY25 interim budget saw a 5.2 per cent growth in allocation to CPSEs for capex. For CPSEs, capex has been led by petroleum and natural gas, power, and renewable energy,” it added.

For FY25, CareEdge Ratings anticipates a gross tax revenue growth of 11 per cent, surpassing the budgeted growth rate of 10.6 per cent due to robust increases in direct tax collections. They project an overall revenue collection surplus of Rs 1.4 trillion compared to the interim budget estimates. As a result, the ratings agency expects tax buoyancy to reach 1.04, slightly exceeding the budgeted buoyancy of 0.96 for FY25.

According to CareEdge Ratings, additional revenue growth is expected to help reduce the fiscal deficit target for FY25 to 5 per cent of GDP, down from the interim budget’s target of 5.1 per cent of GDP, even after considering increased revenue expenditure.

It projected a higher nominal GDP growth rate for FY25 at 10.7 per cent, compared to the interim budget’s estimate of 10.5 per cent.

The rating agency also noted that general government debt has risen to 83 per cent of GDP in FY24, creating a substantial interest burden. “With sovereign rating agencies watching the debt trajectory, the focus on fiscal consolidation should continue,” the rating agency said.

CareEdge Ratings also anticipates a reduction in government borrowing in FY25, with net borrowing expected to be in the range of Rs 11.2-11.4 trillion (compared to Rs 11.8 trillion in the interim budget) and gross borrowing projected to be between Rs 13.6-13.8 trillion (versus Rs 14.1 trillion as per the interim budget). A lower supply of government securities (G-sec) in FY25, combined with increased demand due to India’s inclusion in global bond indices, is likely to ease G-sec yields during the fiscal year. “Anticipation of the RBI initiating policy rate cuts in H2 (October-March) may further exert downward pressure on G-sec yields. By the end of FY25, 10-year G-sec yields are projected to range between 6.5-6.6 per cent,” it added.

The rating agency further believes that the government's divestment plans have fallen short of their targets for five consecutive years.

“We estimate a total divestment potential of Rs 11.5 trillion (assuming the Centre retains a 51 per cent stake). However, the decision to divest will depend on market conditions and the strategic nature of the firms. In case divestment lags going ahead due to headwinds, the government will continue with its focus on asset monetisation. Plausible divestment includes Shipping Corp, Pawan Hans, NMDC Steel, and CONCOR,” Sinha said.