Interim Budget 2024 is intriguing in its long-term perspective

February in an election year generally does not draw the same excitement and anticipation for the Budget that other years draw. The Interim Budget provides short-term funding for government operations until a new administration is chosen, which is why Interim Budgets often do not make significant policy changes; instead, they concentrate on preserving continuity. However, there were certain intriguing aspects in the Interim Budget presented by Finance Minister Nirmala Sitharaman on February 1 that warrant a look from the long-term perspective of the Indian economy.

Fiscal consolidation is encouraging

Fiscal deficit refers to the difference between a government's spending and its revenue (income). It is a way of measuring how much a government needs to borrow to meet its expenses when its spending surpasses its earnings.

One of the key highlights of this budget was the fiscal consolidation path that the government has mapped for the future years. While it was expected from the April to December fiscal numbers for FY2024 that there could be a downward revision of the FY2024 fiscal deficit target (revised to 5.8 per cent of GDP from 5.9 per cent), the target for FY2025 set at 5.1 per cent of the GDP presents an encouraging prospect — if achieved.

Reducing fiscal deficit indicates that the government would need to borrow less money to fund its expenses, which, in turn, reduces the risk on government bonds. As a result, the yields on government bonds decrease without the government reducing the policy rates. Considering that global economies are on the cusp of a possible rate-cut cycle, yields on government bonds could go even lower which would then translate to cheaper credit for the economy, eventually leading to better margins, more impetus for growth, and higher consumption, if other macroeconomic factors are kept in check.

If an economy can spur growth in such an empowering way, rather than temporary short-term measures, to increase consumption power in the hands of the individuals, the health of the economy improves in a sustained manner. However, the execution part is tough, and it remains to be seen whether the targets materialise.

Housing sector triggers

Under the Pradhan Mantri Awas Yojna (PMAY)-Garmeen, the government has set a goal to build 20 million more houses over the next five years. With multiplier effects on the housing finance, cement, steel, and paints industries, this enhanced attention to the PMAY is anticipated to spur investments and heightened activity in the construction sector, demonstrating a considerable beneficial impact across many sectors.

Continued focus on logistics

Logistics is one sector where India lags severely compared to other developed nations. As per the Economic Survey 2021, the logistics industry accounts for 13-14 per cent of India’s GDP which is significantly higher than countries like the United States, and China mainly due to inefficiencies that plague this sector. The budget announced three major railway corridor programmes under the PM Gati Shakti for multi-modal connectivity. Efficiencies in logistics have the potential to improve margins in businesses across segments, which is helpful for holistic economic growth.

Hospitality industry boost

Domestic travel has increased since Covid-19, and additional jobs are anticipated to be created as a result of the expansion of air routes and port links. Sitharaman said that the states will be encouraged to embark on the comprehensive development of iconic tourist destinations, branding and marketing them globally, and that the Union government will provide long-term interest-free loans to the states for financing this development.

The tourism budget estimate has increased by more than 2 per cent from the previous budget. This bodes well for the hospitality industry along with opportunities for local entrepreneurship.

Capex plans

One of the major talking points of the budget was the government’s capital expenditure plans. The Interim Budget for FY2025 has allocated Rs 11.11 lakh-crore to capex, representing 3.4 per cent of the GDP, an 11.1 per cent rise from the previous year's allocation of Rs 10 lakh-crore. In the last few years, the government’s push for capex has seen massive growth.

The government, in essence now, has put the ball in the court of private players to increase their capex in respective sectors. If banking policies go into an expansionary mode later in the year, then the government would want more capex measures from the private sector, and that is when the mixture of public and private capex spending would create capacities for future growth.

One area that has been a target miss for some years now is the disinvestment target. Privatisation delays have led to the government revising disinvestment estimates on the lower side. The budgeted estimate for FY2024 was Rs 50,000 crore, which has been revised to Rs 30,000 crore. As of now, the government has raised only about Rs 12,500 crore with less than two months to go before the end of the financial year. The government has an opportunity to somewhat reduce its ownership stake (without sacrificing control) in several companies thanks to the present PSU stock rally. Several power and railway-related stocks, all along the value chain, are at or close to all-time highs and present the government with an alluring option for liquidity. Will it take the plunge?

(Parimal Ade (X: @AdeParimal) is Founder, and Gaurav Jain (X: @gaurav28jain) is Co-Founder, Investyadnya.in.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.