In an interview with ETMarkets, Chhaochharia said: “For middle class, we are unlikely to see any structural change though we may see simplified tax administration proposals,” Edited excerpts:

Thanks for taking the time out. The month of January started on a roller coaster note ahead of the big domestic event – Union Budget 2025. Do you see some recovery in the market post the event?
The Indian markets’ correction reflects growth disappointment over the last few months, even vs muted expectations. Fiscal consolidation (that too front loaded) and monetary policy arguably played a role in the cyclical slowdown.

Any change in these will help outlook for growth and thus markets. Beyond that, mix of spending and measures for long-term growth will be the key for markets as far as Budget is concerned.

Any reforms agenda can help too, though we have seen any meaningful reforms being done outside the Budget in recent years.

Broadly, impact of the budget on the markets may be likely muted, as capex and consumption boosts may not be material if the fiscal deficit is to be contained at less than 4.5% of GDP in FY2

What are your big expectations from Budget 2025?
Our economist expects fiscal consolidation of 40bps from the Budget vs the nearly 80bps in FY25E.From FY27E, we expect the government to shift to a new medium-term fiscal consolidation path linked to reductions in central government debt as a % of GDP.

We think this will give it the flexibility to decide on an appropriate fiscal trajectory based on domestic and global growth dynamics. The Budget may have more details around this.

Overall, we expect government capital spending to pick up next year. We expect gross tax revenue collection growth of 11.5-12.0% YoY in FY26E, in line with the improvement in nominal GDP growth to 10.5% YoY in FY26E. We expect no changes in tax policy, especially for capital markets, in our base case

What are the key priorities for the government in Budget 2025 to ensure long-term economic growth?
We expect capex to grow slightly better than nominal GDP at 12-14% YoY (with a focus on roads & highways, railways and defence), supported by a higher transfer of interest free capex loans to states (with relaxed guidelines).

This compares with a weak capex performance in FY25 YTD down 12% YoY and the high growth of FY21-24 of 30% YoY on average. PLI scheme visibility and expansion can also help visibility on long-term growth.

We still expect the government to increase allocations to boost job creation and skills, and to expand the production-linked incentive (PLI) scheme to include new sectors in a bid to boost manufacturing, along with other measures.

Any specific sectors that could see increased spending in Budget 2025?
The quality of government spending will improve, in our view, with the share of capex in overall spending improving to 22% in FY26E vs. 18% in FY25 YTD and 20% in FY22-24.

There should be more support for rural and agri sectors, directly and indirectly. Just to reiterate, the increased spending may not in itself be material given the fiscal room

Do you see any specific measure coming in the Budget to boost consumption which is showing signs of slowing down? (focus on govt Capex)
We expect some adjustment in income tax for middle-class households, which should help boost disposable income and hence discretionary consumption.

We also expect spending (as % of GDP) on welfare schemes to largely stabilise. We still expect the government to increase allocations to boost job creation and skills, and to expand the production-linked incentive (PLI) scheme to include new sectors in a bid to boost manufacturing, along with other measures

Do you see any changes in direct tax structures which middle-class taxpayers expect in Budget 2025?
Beyond the adjustments discussed above, we are unlikely to see any structural change though we may see simplified tax administration proposals

Are there plans to simplify tax provisions for capital market products further, such as long-term capital gains tax or securities transaction tax?
In our base case, we do not expect any changes in tax policy for markets though any simplification, different from higher taxes, will be welcomed by markets

How does the projected fiscal deficit of 4.5% provide the government with the headroom for increased public spending?
The room can come from some tax buoyancy and some stabilisation in welfare spending, apart from pickup in nominal growth in GDP

What role will Budget 2025 play in accelerating India’s journey towards a $5 trillion economy?
Budgets have some role to play but growth acceleration arguably need more reforms beyond the Budget. So we would be watching out for those beyond the Budget event itself

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