ICRA's analysis ahead of the Union Finance Minister Nirmala Sitharaman's interim Budget presentation suggests that the government is likely to set a fiscal deficit target at 5.3% of GDP for the fiscal year 2024-25, indicating a prudent approach to fiscal consolidation amidst slower capital expenditure growth. The interim Budget, coinciding with the general elections year, is expected to refrain from major announcements, with the full budget presentation slated after the formation of the new government.

ICRA anticipates scrutiny of the government's capital expenditure expansion and fiscal consolidation level, emphasizing their implications for growth and government security yields. The analysis points to a projected fiscal deficit target of 5.3% of GDP for FY2025, aligning with the medium-term objective of sub-4.5% by FY2026. This estimation, combined with an expected dip in the revenue deficit, would allow for a capex target of Rs 10.2 trillion for FY2025, marking a 10% increase from the anticipated level for FY2024.

The report also outlines expectations from the interim Budget for FY2024, highlighting that government revenue receipts are likely to surpass the budget estimate by around Rs 0.5 trillion. Total spending is expected to remain in line with the FY2024 budget estimate of Rs 45.0 trillion, with a potential overshooting in revenue expenditure partially offset by lower-than-budgeted capital expenditure. The fiscal deficit for FY2024 is projected to align with the budget estimate of Rs 17.9 trillion.

Looking ahead to FY2025, the analysis anticipates continued fiscal consolidation by the government. However, a more gradual expansion in capital expenditure is expected, potentially impacting economic activity growth. The interim Budget is likely to focus on maintaining a favorable macroeconomic backdrop, with significant policy changes deemed unlikely at this juncture.

ICRA forecasts a healthy 11% growth in gross tax revenues (GTR) for FY2025, driven by direct taxes and GST collections. The disinvestment target is expected to be set below Rs 500 billion for FY2025, reflecting a cautious approach to account for market uncertainties. Revenue expenditure is projected to increase modestly by around 4% in FY2025, with a continued focus on reducing other expenses.

The analysis concludes with expectations of a fiscal deficit target of 5.3% of GDP for FY2025, positioning it between the anticipated 6.0% in FY2024 and the medium-term target of 4.5% for FY2026. The General Government deficit is anticipated to decrease to 8.3% of GDP in FY2025, marking the lowest level since FY2020. Net General Government dated market borrowings for FY2025 are expected to rise marginally to Rs 18.6 trillion, with stable market borrowings supporting favorable yields.