Interim Budget 2024 Review - Exhilarant Growth Claims Of Budget-25 Mask The Fiscal-Monetary Drags: Systematix

Systematix Research Report

Interim budget pivoted on growth optimism

The interim budget is pivoted on the assumption of a robust economy, in line with the latest advance estimates of CSO and the government's rosy assessment in their latest monthly assessment.

The Finance Minister Nirmala Sitharaman claims rising incomes, historical upliftment of people from poverty, private capex revival, and robust employment generation.

The nominal GDP is projected to grow by 10.5% in FY25BE (7% real and 3.5% inflation) versus 8.9% in FY24AE.

Concomitant fiscal drag and RBI’s tightening would require a gigantic counterbalance

The fiscal structure of the interim budget FY25 will be a drag on the already weak aggregate demand for the economy. This comes against the backdrop of declining global trade volumes, a major post-pandemic thrust for India’s recovery.

This makes the role of private capex and household consumption spending very crucial for India’s outlook. The real gross domestic product data for H1 FY24 shows that, excluding the discrepancies, total expenditure across households, governments, and net exports grew by just 2.3% YoY (versus headline growth of 7.7%), despite the heavy lifting by government capex (~50% YoY in real terms).

With an average capital formation growth of 9.5%, the implied residual of private capex would have still declined, contrary to the budget assumptions.

We have also shown that after extracting the leveraged part, the overall household consumption is estimated to have grown by 115% YoY in H1 FY24 in real terms, from the overall private final consumption expenditure growth of 4.5% in H1 FY24, the real non-leverage portion may have declined by 2.5% YoY, indicating a decline in real household income as well.

The evidence is also reflected in the contraction in sales growth of non-finance companies (-1.5% in H1 FY24) and consumer companies continuing to deliver weak volume numbers in Q3 FY24

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