FY25 budget announcement is scheduled on 23rd July 2024. Key debate is on government’s allocation for USD 16.2 billion of excess dividend receipts from the RBI & CPSEs. About USD 6.6 billion allocations is expected to stimulate state capex, USD 9.6 billion towards populism to boost consumption and no change to FY25 fiscal deficit target at 5.1 per cent is expected, revealed a latest report by Bank of America.
It is further suggested that USD 6 billion lower than budgeted capex spends in FY24 (low base) and likely USD 6.6 billion of further capex allocation to states (could be largely towards Telangana & Bihar), could boost FY25 capex allocations to 23 per cent growth compared to 11 per cent estimated in
the Feb ’24 budget.
Step-up in rural infra (28 per cent of FY25 budgeted capex) is expected — its growth at 13 per cent CAGR in past 5 years has lagged overall capex at 27 per cent CAGR.
Besides, populism led by tax sops for income less than Rs 2 million p.a. (benefits 95 per cent of tax filers) has the potential to drive consumption revival — USD 9.6 billion equates to nearly 1.5 per cent of total food & grocery market in India, said the report.
Capital gain taxes reforms likely
Over the past ten years India has already more than quadrupled the number of tax payers to 39 million (as of FY23). Despite this, only 6 per cent of households pay taxes implying potential to broaden the tax net.
It is believed that the Government could curtail deductions & continue to simplify tax structure to compel taxpayers to shift to the new tax regime. This could be a win-win as it allows tax administration to focus on widening tax net (vs checking deductions from existing payers) while simplifying compliance for taxpayers, the report said.
The government is also expected to align the ‘holding period’ definition for ‘Long term capital gains taxes’ across asset classes to 36 months compared to differing time horizons currently — 12/24/36 months for equities & mutual funds/real estate/unlisted debt securities respectively, it added.
Innovation fund, housing scheme key upsides
It is believed that specific details and allocations for announcements made during the Feb’24 budget around USD 12 billion innovation fund, mid-income housing scheme and widening of PLI sectors could provide long-term economic growth visibility & justify valuation expansion for the markets.
Conversely, a hike in short term capital gains taxes for equities & budget policies favoring excessive populism are key downside risk for markets, said the report.
