Union Budget 2024 likely to focus more on boosting consumption, says Nuvama; names potential key beneficiary sectors

The economic and political landscape has changed since the interim budget in February. During that time, the BJP government has been on solid political ground, having secured victories in three state assembly elections. There were widespread expectations that Prime Minister Modi would secure a clear mandate for a third term in the general elections.

However, the general election results came as a surprise. The BJP failed to secure a majority, leading to the formation of a coalition government at the Centre. While the BJP fared well in urban areas, it faced setbacks in rural constituencies, probably due to the ongoing economic challenges in these regions.

Against this backdrop, the full budget for fiscal year 2025 will be presented on July 23 and is expected to give greater emphasis to rural and lower-income households. Early signs of this shift are already visible with states like Maharashtra and Telangana implementing various welfare schemes for the rural population.

The government is likely to continue to exercise fiscal prudence, but the narrative in the budget is likely to shift from an emphasis on investment spending to a greater focus on consumption, according to a latest report by domestic brokerage firm Nuvama Institutional Equities.

RBI dividend to be converted into transfers

The central government received an additional dividend in excess of ₹1 trillion. The brokerage suggests that if the government uses this additional dividend entirely to increase spending in urban and rural areas, it could potentially increase revenue expenditure (excluding interest and subsidies) by 10% year-on-year.

This contrasts with the budget’s interim projection of 0-1% growth based on revised estimates for fiscal 2024 and 3% growth based on provisional actuals for fiscal 2024.

“If that happens, it could help support consumption at a lower level, but we don’t think it will be big enough to materially change the course of the business cycle (which we think is slowing). As we argued in our last economic note, India is currently facing a demand shortfall due to a lack of macroeconomic recycling,” Nuvama said.

Can the State Treasury obtain additional funds?

Given the expected moderation in tax revenues, the finance minister may explore alternative sources of financing to boost downstream spending without compromising capital spending. The brokerage identified three potential approaches, one of which is to temporarily halt fiscal consolidation to raise additional funds to stimulate consumption.

While the central government’s fiscal deficit remains 200 basis points above the pre-COVID target, the aggregate public deficit (including the Centre, states and PSUs) has almost returned to pre-COVID levels. Moreover, macroeconomic stability remains high with benign core inflation and a manageable current account deficit. Stopping fiscal consolidation could help address the macroeconomic demand problem.

Another way is to raise funds outside the budget through the balance sheets of government entities like NHAI, Indian Railways or other public sector undertakings, through additional borrowing or monetisation of existing assets.

Public sector enterprises have undergone significant consolidation in recent years and this approach could shift some of the burden of reviving domestic demand to these enterprises without deviating from the Centre’s path of flexible fiscal policy.

In addition, the government could significantly increase its divestment target, taking advantage of buoyant capital markets and high valuations, especially for state-owned enterprises. Interestingly, divestment has been slow in recent years. Such an approach could provide a significant boost to the treasury’s resources, helping to cover necessary spending without undermining fiscal prudence.

The brokerage firm stressed that by exploring these options for acquiring additional resources, the government could potentially secure around ₹1-1.5 trillion. If these funds are redirected to consumption, brokers predict a significant revival in demand in the lower segment of the economy.

Sectors to watch

The media sector is likely to benefit if the government focuses on consumption. Additionally, companies producing goods that have a significant impact on rural areas will benefit, as rising rural incomes generally support overall consumption.

In addition, the fertilizer sector stands to benefit from these changes. Nuvama predicts that the government will allocate ₹$2 trillion for the Department of Agriculture to expand flagship programs focused on income support and crop insurance for farmers.

Reservation: The views and recommendations in this article are those of the individual analysts. They do not reflect the views of Mint. We recommend that investors consult certified experts before making any investment decisions.