Budget 2024: High RBI Dividend, Improved Tax Collection Allow Fiscal Headroom, Says Citi
The equity market could watch out for any potential changes to taxation on equities and derivatives, the brokerage said.
Higher dividend by Reserve Bank of India and slightly improved tax collection trends have generated an additional fiscal space of approximately 0.45% of GDP, according to Citi. This is viable even if the government decides to maintain the financial year 2025 fiscal deficit at the interim budget target of 5.1% of gross domestic product.
Provisional monthly data shows that the financial year 2024 fiscal deficit was at 5.6% of GDP, 0.27% of GDP lower than the revised estimate announced in February, the brokerage said in a note. For fiscal 2025, it suggests a lower fiscal deficit, even if we consider similar year-on-year growth as mentioned in the interim budget in February 2024.
The RBI’s dividend transfer for fiscal year 2025 exceeded the budgeted amount by Rs 1-1.2 lakh crore. This surplus will be crucial for making any necessary adjustments to the fiscal strategy, Citi said.
No major changes would be made to the tax structure, according to the brokerage. It expects the central government's revenue to reach Rs 4 lakh crore, higher than the interim budget estimate presented in February.
The implied additional fiscal space could be utilised to improve the allotment made to expenditure by 0.25% of GDP as against the February 2024 interim budget. The improved trend of expenditure is expected to continue in fiscal 2025 as the capex-to-GDP ratio may increase from 3.4% in the interim budget to 3.5%.
At a fiscal deficit of 4.9% of GDP, Citi estimates the gross government security supply to be at Rs 13.6 lakh crore that is Rs 50,000 crore lower that the interim budget.
The expected fiscal consolidation of 0.7% of GDP would be in line with the interim budget forecast, which estimated a deficit of 5.1% of GDP for fiscal 2025, down from 5.8% in FY24.
This would bring the fiscal deficit closer to the 4.5% of GDP target for the financial year 2026. This is crucial for a potential sovereign rating upgrade. The market will seek clarity on the fiscal deficit's trajectory beyond fiscal 2026, Citi said.
Allocation Of Additional Fiscal Space In Equity Markets
Part of the additional fiscal space could be used to reduce the deficit and the rest could be utilised to enhance the spending in infrastructure, affordable housing, and rural schemes. Citi also expects incremental policy support for increased gas usage in the energy mix, health insurance, and domestic manufacturing.
The equity market could watch out for any potential changes to taxation on equities and derivatives, along with announcements that could assist the consumer staples, autos, industrials and real estate segments, it said.
