In fiscal policy, the strategic deployment of countercyclical measures is paramount. During economic slowdowns, fiscal tools become instrumental in bolstering growth, with a subsequent retraction during periods of robust economic expansion. Amidst the challenges posed by the covid-19 pandemic, the government adeptly employed an expansionary fiscal policy to support the economy. However, as the nation emerged from the pandemic-induced trough and entered a phase of recovery, it became imperative for the government to consolidate its fiscal position. This consolidation provides the necessary space for the private sector to thrive, particularly during cyclical upturns when tax buoyancy is naturally higher.
The interim budget by the finance minister distinctly underscores the government’s commitment to fiscal consolidation. This move represents a bold departure from populist measures, especially considering it is an election year. With a targeted fiscal deficit of 5.1%, the government is aligning itself to achieve a 4.5% deficit by FY26. From a macroeconomic standpoint, this fiscal discipline is crucial at this juncture, allowing the government to step back and facilitate the private sector’s pivotal role in propelling growth. Failure to do so would have posed a risk of resource scarcity, with both the government and private sector vying for limited resources in the economy.
Examining the budget’s intricacies reveals that the onus of consolidation is predominantly on curtailing revenue expenditure in areas such as food subsidy, defence, NREGA, PM Kisan, and Jal-Jeevan Mission. Notably, the growth in the rural economy, which relies heavily on urban and government transfers, now places increased importance on urban transfers as government expenditure appears relatively restrained.
In terms of deficit financing, the government has tapped into the idle funds within the GST compensation fund. This move has led to a reduction in gross market borrowing for FY 2025, dropping from ₹ 15.4 lakh crore in FY 2024 to ₹ 14.1 lakh crore. This development bodes well for the bond markets in the short term, which are already experiencing heightened demand following the inclusion in the JP Morgan EM bond index. However, the medium-term trajectory of bond yields will be shaped by evolving expectations on growth and inflation. As the economy continues to thrive, bond markets appear to be in a neutral zone, with yields anticipated to remain volatile within a range rather than trending in a specific direction.
Anticipating continued robust growth, we foresee the Reserve Bank of India (RBI) maintaining a neutral stance. In this scenario, a tactical approach to duration is crucial, with active management emerging as the preferred strategy to navigate fixed-income markets, especially amidst uncertain global factors and a low probability of impending rate cuts. The interim budget, with its focus on fiscal prudence, sets the stage for a harmonious interplay between government and private sector dynamics, promising a crescendo of economic growth in the upcoming fiscal landscape.
Manish Banthia is chief investment officer, fixed income, ICICI Prudential Mutual Fund.