Informist, Friday, Jan. 17, 2025

--IDFC FIRST Bk's Sen Gupta:FY26 Budget must address urban demand slowdown

--CONTEXT: IDFC FIRST Bank Chief Economist Sen Gupta's comments in interview

--IDFC FIRST Bk's Sen Gupta:Urban slowdown started FY24, now more pronounced

--IDFC FIRST Bk's Sen Gupta: See govt missing FY25 capex aim by INR 1.5 tln

--IDFC FIRST Bank's Sen Gupta: Income tax shouldn't be cut at cost of capex

By Priyasmita Dutta and Shubham Rana

NEW DELHI – The Budget for 2025-26 (Apr-Mar) must address the slowdown in urban consumption, which is getting more pronounced now, according to IDFC FIRST Bank Chief Economist Gaura Sen Gupta. "There is a need to boost urban consumption. We've had the past few budgets, which have focused on the rural side. We are lucky that the rural sector has got the support of a good kharif harvest and a good rabi harvest. Now, we need something for the urban sector," Sen Gupta told Informist in an interview.

The slowdown in urban growth that started in the second half of FY24 is getting "more pronounced" this year, she said. There have been concerns about slowing demand in urban areas, with the finance ministry saying in its recent Monthly Economic Review report that urban demand softened in Jul-Sept. GDP data for the quarter showed growth in private final consumption expenditure cooled to 6.0% from 7.4% in Apr-Jun. Comments by companies in the fast-moving consumer goods space have also highlighted that spending by the middle class is declining.

The Budget could announce a cut in personal income tax rates to push consumption, although its impact may be limited by the number of people in the tax net, Sen Gupta said. If the government has the fiscal space to cut income tax rates, it should do so, especially for those at lower incomes "because that's where the weakness in demand is happening" due to high inflation. The revenue loss to the government from such a move would also be nominal, she said.

CAPEX PUSH

Boosting consumption through measures such as tax cuts, however, should not be at the cost of lower capital expenditure, Sen Gupta said, as investments can boost growth by a greater margin by creating jobs. The Centre has been pushing capital expenditure, although the spending under the head has slowed down in FY25 due to election-related restrictions. The government's capital expenditure in Apr-Nov declined 12.3% on year to INR 5.14 trillion, as per the latest data. Sen Gupta expects the government to miss the Budget capital expenditure target of INR 11.11 trillion in FY25 by nearly INR 1.5 trillion to INR 9.6 trillion. This would amount to roughly 3.0% of GDP, down from 3.4% estimated in the Budget.

However, in FY26, capital expenditure should be raised again such that it is at least 3.4% of the GDP, Sen Gupta said, as private investment continues to be frail. "Private corporate capex will only come when you have a few things--consistent growth and consumption, strong listed-company growth, and strong export growth--all of which is not present."

While a capital expenditure target of 3.4% of GDP for next year would mean the absolute amount may be less than 10% higher than the FY25 Budget estimate, but over 20% higher than Sen Gupta's projection of INR 9.6 trillion for FY25. The Centre can also ensure greater utilisation of its capital expenditure allocation by easing the conditions states must meet to get approval for their long-term interest-free loans, she added.

FISCAL OVERACHIEVEMENT

On the whole, spending and revenue decisions will have to be made keeping in mind the need for continued fiscal consolidation. However, Sen Gupta thinks the Centre should not try to hit the fiscal deficit ball out of the park. "If they overachieve in one year, then they make the target even more stringent for the next year. We would like them to stop doing that, they have done enough," she said.

Sen Gupta expects the government's fiscal deficit in FY25 to be lower at 4.7% of GDP compared with the Budget estimate of 4.9%. However, she said the government should not try to reduce the fiscal deficit sharply below 4.5% of GDP in FY26. Any extra fiscal space should be used to boost capital expenditure, she said.

While more clarity is needed on the Centre's fiscal consolidation path after FY26, when its focus will move from actively targeting the fiscal deficit to reducing the debt-to-GDP ratio, Sen Gupta said the pace of reduction should be gradual and such that the decline in annual fiscal deficits is "much more moderate" than has been the case in recent years.

According to Budget documents, the Centre's debt-to-GDP ratio in FY25 is projected to come down to 56.8% from 58.1% in FY24. As per the Fiscal Responsibility and Budget Management framework, the debt-to-GDP ratio for the central government was to be reduced to 40% by FY25.

The target to lower the Centre's debt-to-GDP ratio should be set, keeping in mind that the fiscal deficit is already closing on to 4.5% and can't be reduced beyond a certain point. "After a couple of years, we will have to keep it (fiscal deficit) constant... It doesn't matter how long (it takes to reach 40%) as long as we are on the right trajectory." End

Edited by Saji George Titus

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