The interim budget (Vote on account) was presented in the parliament last week. We could not have hoped for a more salutary backdrop to present the government’s income and expenditure plan. With a lot of positives on the economic as well as political front, one wished for prudence and rectitude in the budgetary numbers and the finance minister delivered just that!

This budget has unequivocally laid out the government’s commitment to fiscal consolidation by committing itself to reduce the fiscal deficit to 5.1% in FY 25 and thereby paving the way for an eventual consolidation at 4.5% in FY 26. The fiscal deficit number of 5.1% of GDP in FY 25 came in as a big surprise as even the most optimistic projections had penciled in this number at only 5.3%.

It is even more remarkable to note that this consolidation is expected to be achieved without any compromise to the CAPEX spending, but a commensurate reduction will be expected in the revenue spending (read lesser outlays for subsidies!). Prioritizing in this manner, the government has not only reiterated its commitment to fiscal consolidation but also has given clear signal to infrastructure led growth.  

The budget narrative was devoid of any populist measures, thanks to the political momentum witnessed in recent months for the ruling party. For instance, the allocation to the welfare schemes (both Centre and states combined) for the next FY was increased by just 4.7% and overall spending on subsidies is expected to be lower by 7%.

Exiting FY 2024 with head held high!

It must be noted that the pandemic enforced spending had taken the deficits to unprecedented levels in the recent years. Central government fiscal deficit was seen at 9.2% as late as FY 21. The revised estimate for the current FY 24 stands at 5.8% as against the market expectations of 5.9%. There was an appreciable pick-up in tax receipts (Income tax) as well as higher dividends from RBI. Tax buoyancy as defined by tax to GDP ratio is seeing an improvement which augurs well for the fiscal math projected for the next FY.

Key Takeaways – The name is Bond!

Clearly, the budget has been cheered by the bond markets for the credible path presented towards fiscal consolidation. While India is surely on a good footing on various macro parameters, the fiscal piece was found to be not falling in place and the budget math has stated a credible plan forward. This is crucial at a time when the Indian bonds are slated to be part of global bond indices which forms a basis for lot of foreign inflows into Indian bond markets. Going forward, supported by strong macro fundamentals and a commitment for fiscal consolidation must sustain the foreign investors interest in Indian bonds and thereby resulting in meaningful compression of yields. A reduction in bond yields signifies an increase in bond prices and vice versa.

For the equity markets, the commitment to CAPEX spending would be a positive with thrust on segments like Solar, healthcare, housing, energy, and infrastructure.

Conclusion

Overall, the vote on account delivered on a positive note the key policy priorities for the government. While bonds markets have a thing or two to cheer about, equities will focus more on other evolving fundamentals like earnings trajectory, capital flows etc. The positive outlook on bonds will also have its impact on both pure debt and the debt portion of the hybrid investments with expected reduction in bond yields. For the equity investments, India’s policy priorities have been re-iterated, and this direction is unlikely to get reversed once the new government presents the full budget in July.