Finance Minister Nirmala Sitharaman stayed true to the spirit of an Interim Budget by fending off the pressure to announce new schemes and giving tax sops ahead of the General Elections.

Perhaps Sitharaman's only surprise was that she was not surprised at all, yet she accelerated the fiscal consolidation path.

With the fiscal deficit projected to reduce faster than expected to 5.8⁒ of GDP in the current year and to 5.1⁒ of GDP in 2024-25, the medium-term fiscal consolidation target of 4.5⁒ by 2025-26 seems within reach.

The government pushed the pedal on fiscal consolidation for this year even as it faced pressure because of the lower-than-expected nominal GDP growth in 2023-24. The slower nominal GDP growth of 8.9⁒ in 2023-24 meant that the government had to reduce the fiscal deficit to more than the Budget projection in absolute terms to meet the target as a percentage of GDP. Sitharaman bettered on the target, helped by the sharp cut in capital expenditure.

The lower fiscal deficit also meant the government's market borrowing would be lower. The government has projected the gross market borrowing in 2024-25 at 14.13 trillion rupees, sharply lower than the 15.43 trillion rupees projected for the current year. The cut in gross market borrowing is primarily because of a sharply lower provision for repayments of bonds next year.

The Interim Budget projected the repayment of bonds at 2.38 trillion rupees, sharply lower than the actual redemption of 3.61 trillion rupees which are due. According to the Budget documents, the repayments of 2.38 trillion rupees is net of recovery of 1.24 trillion rupees from GST Compensation Fund. However, since there are no bonds which were borrowed to compensate states for the shortfall in GST compensation, due to be repaid in 2024-25, there is still confusion about how this amount is being netted. One is still not sure whether the government will use the GST Compensation Fund to redeem regular government bonds coming up for redemption or use the proceeds to buy back remaining GST bonds, which are due for redemption in 2025-26 and 2026-27.

If the government is buying back bonds due for redemption in 2025-26 and 2026-27, taking it into account this year may be a bit of a financial jugglery.

But the bond market is not complaining. The yield on the 10-year benchmark has fallen by 8 basis points to 7.06⁒ since the Budget was presented. With fund flows likely to come in because of the inclusion of Indian bonds in global bond indices and the likely cut in interest rates by central banks, including the Reserve Bank of India, the yields on government bonds will likely fall sharply in the coming months.

The government seems to have taken its pedal off the accelerator on capital expenditure, with the private sector investments beginning to show signs of improvement. The government cut the capital expenditure for 2023-24 by about 500 billion rupees to 9.5 trillion. This is probably the largest cut in capital expenditure in revised estimates in a decade. Moreover, the government has projected a modest 16.9⁒ increase in capital expenditure to Rs 11.11 trillion rupees for next year. This is a far cry from 25-30⁒ increases in the recent past.

On the receipts side, the government continues to be conservative in its projections for tax collections. The actual tax collections have been sharply higher than the Budget projections in the last two years. Going by the current tax buoyancy, the chances are that the tax collections will be higher than both the revised estimate for 2023-24 and the Budget estimate for 2024-25. The Budget has projected bumper surplus transfer from the Reserve Bank next year as well, which has reduced pressure on the fiscal deficit.

More importantly, the government has not projected a specific target for disinvestment for next year. Though the Budget projected 500 billion rupees from "Miscellaneous Capital Receipts" for next year, there is no specific target for divestment. The Budget documents explain Miscellaneous Capital Receipts as receipts "on account of management of equity investments and public assets through various mechanisms", which include disinvestment and monetisation. The absence of a specific target for divestment will give more room for the government to divest stakes in state-owned companies on the basis of valuation rather than coming under pressure to sell to meet the fiscal deficit target.

The Budget also avoided populism. Unlike the interim budget in 2019, when the government announced a direct income scheme for farmers and income tax sops, Sitharaman did not announce any new scheme or offer tax sops ahead of the elections.

The broad theme of the Budget seems to be that the government is serious about fiscal consolidation. After the elections, the new government will present the full Budget. If Narendra Modi comes back to power, it is likely that the focus will remain on consolidation.

The government has been making a strong case for upgrade of Indian's crediting. The budget has only strengthened the government's pitch.