
As India’s economic narrative unfolds amidst the impending general elections, the foundation of a robust growth story remains intact. Bolstered by increased government capital spending in recent years, the advance estimates for FY2024 showcase an impressive GDP growth of 7.3%, a noteworthy achievement in the current global economic context.
Traditionally, investors turn to the Union Budget for insights into government policy intent and infrastructure spending, crucial factors in sustaining growth momentum. However, the upcoming Union Budget for FY2025 is poised as a vote-on-account before the Elections. With major policy changes expected post-elections around July 2024, the forthcoming budget is likely to provide limited cues.
Despite the limited scope of the vote-on-account, all eyes will be on the fiscal deficit and borrowing figures. It can be anticipated that the Government of India (GoI) is targeting a fiscal deficit of 5.3% of GDP in FY2025, signaling a consolidation from the expected 6.0% in FY2024. This projection implies a welcoming decline in the absolute fiscal deficit figure.
With a healthy capex number of Rs. 10.2 trillion anticipated for FY2025, the focus shifts to revitalizing public investments. Although lower than the post-COVID expansion, the expected double-digit growth of ~10% signals a positive trajectory.
Approximately two-thirds of the fiscal deficit are expected to be financed through market borrowings, aligning with previous fiscal years. It is projected that net Government of India securities (G-sec) issuances at Rs. 11.3 trillion in FY2025, reflecting a slight dip from the estimated Rs. 11.8 trillion in FY2024. This decrease is complemented by a potential demand surge resulting from India’s G-secs inclusion in the J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Index suite from June 2024 onwards.
The G-sec supply decline coincides with an anticipated FPI inflow of $18-22 billion into Indian G-secs, driven by the index inclusion. This injection of funds aligns with a favorable outlook for yields.
In contrast, state governments’ market issuances are expected to rise by 10% in FY2025, reaching Rs. 7.3 trillion, propelled by a fiscal deficit of 3.0% of Gross State Domestic Product (GSDP).
As India navigates its fiscal landscape in FY2025, striking a balance between growth aspirations and fiscal prudence is paramount. The expected softening of Government bond yields, coupled with a potential rate cut cycle, sets the stage for a promising economic trajectory. The proportion of General Government borrowings channeled into financing capex will be instrumental, shaping the momentum for this key engine of growth and paving the way for a vibrant fiscal year ahead.