27

Jan-25

FY26 Budget preview: Fiscal deficit & Gross Borrowing to be closely watched

The finance minister will table the Union Budget on 1st Feb for FY26; this will be the first full-year budget for the re-elected
government. This Budget comes against the backdrop of a sharper than anticipated slowdown in real GDP growth,
persistence in food inflation, and a rapid depreciation in currency. It would be interesting to see if the Budget would
emphasize upon measures to boost consumer spending, and if there are any tweaks within the income tax slab distribution.

The fiscal glide path as presented in the July 2024 full year budget noted bringing the fiscal deficit below 4.5% in the next
financial year, though we believe that the GOI is likely to maintain a conservative estimate of 4.5%. The slowdown in
economic growth, amid elevated inflationary pressures could potentially limit the scope of heavy consolidation.

If we assume a FY26 nominal growth at 10.50% fiscal deficit of ~4.5%, and using the FY25BE nominal GDP estimates, we
estimate the FY26 fiscal deficit to be ~ INR 16.3 tn. Given the historical trend, assuming ~87% of this to be funded by gross
borrowings, puts the estimate for FY26 gross borrowings at INR 14.1 – INR 14.3tn area. We think the fixed income markets
should closely watch this space for further cues in terms or market direction.

The tax revenue assumptions for FY26 will likely be more conservative, while expenditure trends will be more tilted towards
revenue spends to support pickup in consumer spending and continued efforts towards job creation and skill growth among
the youth. Steps for boosting capex in select manufacturing sectors will also be closely watched.

We expect the fiscal deficit for the ongoing year to be maintained at 4.9% of GDP (despite slowdown in nominal GDP growth).
In the first 8 months of FY25, the gross fiscal deficit and revenue deficit was higher than same time last year. The revenue
expenditure growth in Nov FYTD25 picked faster than last year – driven by food and petroleum subsidies, while capital
expenditure softened (though it picked up in Nov’24). The gross tax revenue growth was led by income tax, GST and custom
duty, while corporation tax growth declined.

Past borrowing plan as stated in the Budget documents:

Borrowing plan (INR bn) FY25BE FY25BE (I) FY24RE FY24BE FY23A
Net Borrowing 11,632 11,752 11,805 11,809 11,083
Gross Borrowing 14,010 14,130 15,430 15,430 14,210
Repayments -2,378 -2,378 -3,625 -3,621 -3,127
Back-to-back loans to States/UTs 0 0 0 0 0
Recovery from GST compensation fund 0 0 0 0 0
Short term borrowings -500 500 13 500 1,120
Others 0 0 0 0 0
Net Total Borrowings 11,132 12,252 11,818 12,309 12,203
Securities against small savings 4,201 4,662 4,713 4,713 3,959
Other Receipts 801 -59 817 846 1,216
Total Fiscal Deficit 16,133 16,855 17,348 17,868 17,378
Incremental deficit -1,215 -493 -520 315 766

Ajay Marwaha Aditya Gore, CFA

Payal Shah, Head: International Coverage &
Senior Research Analyst, Fixed Head: Fixed Income Markets,
+44 7459 360947 Research, Fixed Income Markets
Income Markets, +91 77386 15087
+91 8422095462 ajay.marwaha@nuvama.com
aditya.gore@nuvama.com
payalk.shah@nuvama.com
Fiscal math:

Particulars (INR bn) FY25BE FY25BE (I) FY24RE FY23A

Tax revenue (net) 25,835 26,016 23,239 20,978
Corporation Tax 10,200 10,428 9,227 8,258
Taxes on Income 11,870 11,560 10,223 8,333
GST 10,619 10,677 9,566 8,491
Others 5,618 5,549 5,197 5,380
Less - States share -12,472 -12,198 -10,973 -9,484
Non-tax revenue 5,457 3,997 3,758 2,854
Total Dividend 2,891 1,500 1,544 999
Dividend from RBI &Others 2,329 1,020 1,044 400
Other non-tax revenue 2,566 2,497 2,214 1,855
Non-debt Capital Receipts 780 790 560 722
Disinvestment 500 500 300 353
Total receipts 32,072 30,803 27,557 24,554

Total Exp 48,205 47,658 44,905 41,932

Revenue Exp 37,094 36,547 35,402 34,531
Capital Exp 11,111 11,111 9,502 7,400
Fiscal deficit 16,133 16,855 17,348 17,378

Fiscal deficit/GDP (%) 4.94 5.14 5.8 6.4

Revenue deficit/GDP (%) 1.8 2.0 2.8 3.9

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