Is it going to be a bit of a balancing act between politics and economics or would one lead the other?
Sonal Varma: We do think it is going to be a balancing act. Of course, this is a pre-election budget, so we think the announcements will be geared towards some of the constituents. So, as the BJP has flagged its GYAN strategy in terms of focusing on the poor, youth, women and farmers, we do think allocations to these specific schemes will increase, but not at the cost of fiscal consolidation.

I think the medium-term aim of getting the deficit down to 4.5% of GDP by FY26 is an intent of the government and FY25 is therefore an intermediate target to get there. So that balancing will partly be achieved by slowing the pace of capex growth slightly in FY25.

We have had very buoyant tax collections. Do you think the government’s fiscal deficit targets would be easily met?
Sonal Varma: For FY24, you mean?

Yes, and FY25 as well.
Sonal Varma: Yes, so for FY24, there are moving parts. On the positive side, we have had higher direct tax collections. Dividends have been stronger than expected. But there are also certain disappointments. Nominal GDP growth is lesser in terms of the value. The indirect tax collections have been lower. Disinvestment proceeds are lower. And on the revenue expenditure side, particularly on specific subsidies, the total allocations are actually higher.

So, there are positives and negatives. We do think the commitment to 5.9% is there and it will partly be met through these offsetting factors and partly by mildly slowing the pace of capex growth relative to the budget target in FY24. So, we think it will be achieved. Now, for FY25, our expectation is that the government will set a deficit target of 5.3% of GDP and backing it, there will be an assumption of nominal growth of around 10.5% compared to the very high buoyancy we have seen on direct taxes in FY24 which is like 2.4 times compared to typical direct tax buoyancy of around one, one-and-a-half.

We think the government will be conservative. The buoyancy estimates on average should be closer to one; direct tax slightly over one, indirect tax slightly below one. So, underlying those assumptions, plus the expectation of a slowdown in capex growth, although still robust, 5.3% of GDP can be achieved.What is your assumption when it comes to the capex rate?
Sonal Varma: When it comes to capital expenditure, both the quantum and the timing are important to remember when considering FY25. So, in terms of the absolute quantum, the growth rates will slow. In FY24, the final central government capex increase will come to around 26-27% on a year-over-year basis, still quite robust. For FY25, we are expecting central government allocation to moderate to around 16% on a YoY basis.

But government capex and a strong one at that, despite fiscal consolidation, has what sort of chucked or driven the economy all through the past fiscal. Now that the fiscal impulse is going to sort of slow down a little bit, you think the drag would be limited or would it be a big jolt?
Sonal Varma: From our perspective, we think there will be a slowdown in real GDP growth in FY25. So, compared to the advance estimate which is 7.3%, our own estimate for FY24 is around 7%. We think real GDP growth will slow down to around 6% in FY25. One reason is the moderation in both central and state government capex.

The second reason is really on the discretionary side of consumption. The tight liquidity we are seeing in the banking system plus the tightening in macroprudential norms on consumer lending we think will moderate some bit of discretionary demand going forward.

Finally, the terms of trade have been a major growth tailwind for India this year. We can see that in terms of 20-25% profit growth versus sales growth that are low single digit, that of course came through because of the decline in commodity price and greater profits for companies, that incrementally that benefit may not filter through in FY25. We do think there will be some moderation on account of that. And just one final point, the composition of growth still remains quite uneven. The rural urban split and the public versus private capex split, we are still not seeing a broad basing of the private capex cycle. So, yes, we are building in some moderation in growth next financial year as a result of those factors.

More than parliament, eventually this year is going to be about what the RBI actually does. The ball is going to be in their court. And the shift will be totally towards the monetary stance as opposed to what the government does.
Sonal Varma: Yes, I would agree with that. If you look at the current state of play, we do think liquidity conditions are way too tight. Some of this has happened because of the government’s high cash balance. But ultimately, this is putting a lot of strain on banking system liquidity. And I think this situation of persistent tightness in banking system liquidity has continued for many months now.

With the call rate, in fact, above the upper band of the policy corridor which is the MSF rate? So essentially, something needs to be done about this in terms of injecting more liquidity, probably right now, more via the frictional instruments that the RBI has, such as longer dated VRR. But if that by itself is not able to resolve the issue, then I think more policy measures will be needed. So yes, the sequencing, I think globally now the discussion is towards the timing and the pace of policy easing across central banks.

We think a similar discussion is going to start in India with respect to the sequencing of the policy exit. We think that the sequencing is going to begin with liquidity easing measures from the Reserve Bank of India, some of which could get announced in the policy decision that is coming up in early Feb, more via frictional tools to deal with this tight banking system liquidity.

But over the coming months, the policy stance of withdrawal of accommodation is a bit stale and should be changed back to neutral to remove that tightening bias. Third, following through with respect to more repo rate cuts. If we take a step back here, while the headline growth numbers have been stronger than expected, the composition of growth has not been up to where we would like it to be in terms of broad-based growth.

Second, despite the recurrent food price shocks, we have seen core inflation dis-inflate faster than expected. We are right now sitting at 3.8% on core inflation. The annualised momentum there is actually running closer to 3.5%. I think that should give a lot of comfort to the MPC because while we are in a three to six-month period of higher headline inflation for most part of June 2024 onwards until end of FY25, we do see headline inflation converging to core inflation around 4%. So very high real interest rates should be one reason the MPC discusses and then decides to actually cut the repo rate.

What do you think could be some of the focus areas in the interim budget? There is a lot of chatter that perhaps there could be something announced for housing, for instance, for the urban poor and the other minority groups, just wanted to understand your own thoughts here.
Sonal Varma: As I mentioned earlier, our view is that the budget will be aligned with the BJP’s thrust on this GYAN strategy. So, for the gareeb or the poor, in terms of more affordable housing but also higher allocations on pension, potentially on the insurance side, so enhanced coverage on that front.

For the farmer and related constituents, we think the allocation under PM Kisan could be increased from Rs 6,000 to Rs 8,000. For instance, the crop insurance cover that they have that could be expanded to include health and life insurance as well, for instance. Then for the women, this has been one area that is both economically as well as politically quite important. One of the potential expectations here is for doubling the allocations that are given to landowning women. Already we have seen allocations under the LPG gas cylinder actually go up. So that has already happened.

Finally, as you were mentioning on the affordable housing side, expanding the coverage in terms of interest rate subsidy for lower income and middle income houses in urban areas, that is one possibility.

On the income tax side, the old exemption regime could be extended for some more time. We have some existing schemes that can be extended or expanded or some new schemes focused on specific constituents that could get announced in this specific budget.

The other thing I would flag is, while we are discussing this as an interim budget, if we look back at the last two interim budgets, the fiscal deficit that was given in the final budget in July was actually largely similar to the initial intent that was pencilled in the interim budget in February. So whatever it is that the government shows on the interim budget, we do think that those numbers and allocations will be retained when the final budget is presented in July.