Budget 2024: Jefferies expects capex growth to slow in FY25

Finance Minister Nirmala Sitharaman is set to present the interim Budget for the financial year 2024-25 on February 1, ahead of the Lok Sabha election due this year. Foreign brokerage Jefferies expects that there could be a moderation in public capital expenditure (capex) growth plans in the budget as the government's commitment to cut fiscal deficit to 4.5% of GDP by FY26, limits the total expenditure growth.

The brokerage in its latest report says that the capex growth is expected to “significantly” moderate in FY25 as the government remains focused on fiscal consolidation and might turn spending towards welfare before national elections. The central government’s capex, which has tripled over the last 5 years, is projected to be in the range of 7-8% in FY25, versus 25% over the last 4 years.

Last year, FM Sitharaman had increased the capital investment outlay for 2023-24 by 33% to ₹10 lakh crore over ₹7.28 lakh crore in FY23, which was equivalent to 3.3% of the country's GDP.

“FY25E growth could be limited to 7-8%, as fiscal consolidation takes a toll. This low number might disappoint the market; and stocks exposed to the government capex program may see some correction. We recently cut L&T to neutral in our model portfolio. Potential slowdown in Govt capex should get offset with the continued housing upturn and private sector capex,” the brokerage says in its report.

The government has committed to a process of deficit reduction post Covid (announced in Feb’22), and has cut the fiscal deficit from the Covid high of 9.1% of GDP in FY21 to 5.9% by FY24E. A further reduction of 1.4% is planned over FY24-26E to 4.5% of GDP. “We estimate FY25E fiscal deficit target at 5.2% of GDP. Assuming the tax revenue growth at ~12.5% (similar to FY24E, driven by 11% nominal GDP and 15% corporate earnings growth); the total expenditure growth would have to be limited to 7-8%,” the report notes.

The report further highlights that the recent state elections showed that income transfer to welfare schemes has been key to campaigns; including for the BJP. Ahead of the 2024 polls, while a large new scheme is possible, some existing popular schemes may also get expansion or extra resources such as farmer income transfer, housing for all, health insurance etc. Overall, the social spending of the government (ex subsidies) is expected to rise by around 7-8% in FY25E against a 4% increase in FY24E.

Jefferies also states that the interim budget will be 'The Budget' for FY25, citing 2019 precedence. “The post-election FY20 budget had only minor adjustments from the interim budget presented in February 2019. Our analysis shows that revenue / expenditure and fiscal deficit estimates in the later budget were within 1ppt / 10bps of the Feb 19 one. The major announcements of 2019 viz. the welfare scheme for farmers (income transfer of Rs750 billion) was announced in the interim budget itself. We expect a continuation of the precedent for the February 2024 budget.”