The interim budget for next fiscal was set against the backdrop of a resilient economy in the face of rising global risks and uncertainties. The economy expanded at a higher-than-expected 7.3% this fiscal, and the Budget bakes in a scenario of growth momentum continuing in the next fiscal.

That said, a sharp slowdown in agricultural growth, relative underperformance of the rural economy and high food inflation had demanded attention. And then there was the need to trim the fiscal deficit-GDP ratio to be on the committed glide path to 4.5% by fiscal 2026.

Even as private corporate investment is yet to materially lift, the government needed to gently pull back its aggressive capex. The Budget has tried to strike a balance between these objectives without losing sight of the medium-term growth prospects of the Indian economy.

The underlying growth assumptions and fiscal targets appear achievable. Like the Budget, we also expect nominal GDP growth of 10.5% next fiscal. Tax collections are expected to grow a conservative 11.4 % in the coming fiscal, compared with 12.5% for this fiscal as per revised estimates in the interim Budget.

Another revenue source that needs attention is divestments, which failed to meet the budgetary target for this fiscal. In the last nine Budgets, the NDA government achieved its budgetary divestment target only twice. Even to achieve the target of Rs 50,000 crore next fiscal, the government will need to front-load its efforts.

The NDA government has been fiscally conservative since it came to power in 2014, when it maintained the key fiscal parameters proposed in the interim Budget by the outgoing UPA-II government.

Little surprise, therefore, that the Budget targets a cut in the fiscal deficit-GDP ratio by 70 basis points to 5.1% for next fiscal in an election year. To this end, the government has pulled back on the extraordinary capex thrust of the last Budget. The expectation is that pick-up in private capex next fiscal will support overall capex momentum.

Fiscal consolidation will smoothen the process of India’s inclusion in JP Morgan bond index, as the country will now be subject to more fiscal scrutiny. Deficit reduction will also complement the Reserve Bank of India’s measures to lower retail inflation to its medium-term target of 4%. And it will bring down borrowing costs for the exchequer.

Gross and net borrowings have been pegged at Rs 14.1 trillion and Rs 11.75 trillion respectively, lower than last year and the consensus estimates for this year. We expect the yield on the 10-year government bonds to decline to 6.8% by the end of next fiscal from approximately 7.15% at present.

The high capacity utilisation and healthy balance sheets of corporates provide a conducive environment for an uplift in private capex. The government could have helped fast-forward the private investment cycle by announcing measures to reduce policy uncertainty and compliance costs and ushering in a stable tax regime. That could come in the Budget after elections.

The Budget is non-inflationary as fiscal impulse will come down with deficit reduction and it retains focus on the supply side via capex. Private consumption continues to trail GDP growth, and some rural support via Pradhan Mantri Awas Yojna and Gram Sadak Yojna and maintaining the thrust on MGNREGA is unlikely to trigger inflationary pressures.

We expect consumer inflation to soften to 4.5% next fiscal from an estimated 5.5% this fiscal, assuming a normal monsoon and average brent crude oil price at around $80/barrel. That said, upside risks to food inflation persist as agriculture is estimated to have grown by a meagre 1.8% in fiscal 2024. Rabi output could suffer due to reduced sown area and irrigation buffer from reservoirs.

The escalating confrontation in the Red Sea increases the risk of renewed upward pressure on inflation, as it is a major route for transport of commodities and energy. In this setting, a non-inflationary Budget is a pragmatic choice.