Budget And Liquidity View

Can the Government look at additional spending?

Since the time election results are out, there has been a lot of noise that the Government may look at additional spending and possible increase in Fiscal deficit.

Potential income tax cuts, addition to farmer income scheme and increased food subsidies are some of the options being discussed in the capital markets which the government might consider in the upcoming budget.

Three important questions arise:

1. Whether the Government has demonstrated intentions of additional spending in the past


2. If Government decides to announce additional spending whether it would be able to spend


3. Whether it would lead to additional borrowing and increase in Fiscal deficit from 5.1% for FY 24 -25

Government track- record of Expenditure & spending (2014-2024)

An analysis of the last 11 years budgeted expenditure v/s actual expenditure indicates a trend that majority of times BJP/NDA govt has not been able to spend as much as they have announced in the budget.

Source: India Budget, Comptroller and General Accounts

The above table indicates that in 7 out of 11 years the government has spent lower on programs/plans announced in budget. There have been only 3 years where they have spent more than budgeted which includes 2 years due to Covid-19 related fiscal impetus and 1 year where they had to spend more on fertilizer subsidy because of Russia Ukraine Crisis.

Can the Government spend more than announced?

Due to the election season, Government is generally on an embargo to not spend till the Government is formed and full budget is presented, because of which Expenditure spending is already significantly trailing the budget and Government post RBI dividend of INR 2.1 Trillion is sitting on approximately INR 4-5 trillion of surplus.

Generally, in first quarter of the financial year, due to accelerated spending we have seen trends of Government running a deficit or very low surplus and use of the Way and Means Advances (WMA)/ Cash management bills to fund the spending as against a huge surplus of INR 5 trillion as of June 21, 2024.

Can the Government spend more than announced? (Contd.)

Table: Trend of Average Government Surplus / (WMA) for Apr- May each year

Source RBI and Axis MF Internal Liquidity Models

Given we would have less than 9 months to complete the balance full year spending and onset of monsoon, it would be very difficult for Government to do extra spending than already announced in the Interim Budget.

What if Government decides to increase expenditure, does it lead to increase in Fiscal deficit and borrowing?

The surprise dividend gift, which Government got from RBI, has created an additional 0.3%-0.4% of fiscal room for the year and which Government would utilize for additional expenditure. We believe that if there are no tax changes, tax revenue might surprise on a higher side and can add to buffer. Hence, there will not be any additional borrowing or breach in fiscal deficit number of 5.1% for the year 2024-25. In fact, there is a probability that they would reduce the fiscal deficit to~5% for FY24-25 because of bumper RBI dividend.

Impact on banking liquidity

Banking liquidity has remained in deficit for last 3 months due to lack of spending due to elections. In addition, we had an announcement of more than expected RBI dividend last month, which has led to build up of Government balances over INR 5 trillion as of June 21, 2024.

In next 1 month, we have ~ INR 1.5 trillion of government bond maturities and we would also have accelerated spending as Government is already trailing on its expenditure spending for the year which would lead to improvement in banking liquidity which should be positive for short end - bond market curve (up to 2 years).

Source: RBI website and Axis Internal Models

Impact on Bond markets

• Our assessment is that the Government will stick to the path of fiscal consolidation and continue with Fiscal deficit target of 5.1% for FY 25. With positive demand supply dynamics for bonds in the near term on account of inclusion of India’s Sovereign bonds in JP Morgan indices, we expect Government bonds to trade in a range and slowly drift to 6.75% in H2.


• Government surplus is near all time high @~INR 5 trillion as of June 21-2024. We expect that they would accelerate Government spending, which would be positive for short end of Fixed income curve up to 2 years.


• As financial conditions globally are quite easy, we expect RBI to shift its liquidity stance to neutral to positive and keep the operative rate close to repo rate.

Disclaimer

Note has been prepared as of 28th June, 2024. This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

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