Budget may usher in more standardised approach to taxation, focus on capex, PLI: Moody's Analytics

New Delhi, Jul 23 (PTI) The Union Budget for FY25 is likely to usher in a more standardised approach to taxation and ensure policy continuity with higher outlay for capex and PLI schemes while ensuring fiscal prudence, Moody's Analytics said.

Finance Minister Nirmala Sitharaman will present her seventh consecutive Budget on Tuesday. The Budget is the first of the BJP-led government, which won a majority in Parliamentary elections last month.

In a post-election Budget preview, Moody's Analytics Associate Economist Aditi Raman said Prime Minister Narendra Modi's Bharatiya Janata Party will be looking to nurture confidence and public trust in the new coalition government that it now leads.

While capex spending could have a positive spillover effect in the long term, direct incentives are needed to spur investment and household spending in the short term, Raman wrote in the Budget preview note on Monday night.

"The challenge for the government is how to fire up its important household sector while pursuing fiscal consolidation," she said.

Moody's Analytics said that despite the election shaking up government dynamics, it doesn't expect major changes to economic policy in India.

"This post-election budget will likely reinforce the goals set in the pre-election budget, which emphasised infrastructure spending, support to the manufacturing sector, and fiscal prudence," Raman said.

In February's interim Union Budget, the government upped its allocation for capex spending by 11.1 per cent to approximately USD 134 billion, or 3.4 per cent of GDP, for the fiscal year to March 2025.

"India's updated Union Budget will maintain, or quite possibly increase, capital expenditure on infrastructure and funding for production-linked incentive schemes. The budget will also likely usher in a more standardised approach to taxation, but the broad thrust will be one of policy continuity in the wake of the surprising outcome in this year's general election," the note said.

If the Budget includes a bigger allocation for capital expenditure, it will do little for consumption and private-sector investment in the short run, Moody's Analytics said.

Fiscal restraint has been a policy priority of the Modi administration over recent years. The fiscal deficit has been falling as a percentage of nominal GDP since 2021 and in the fiscal year to March was estimated at 5.8 per cent.

In the interim Budget, the deficit was forecast to fall to 5.1 per cent of GDP in this fiscal to March 2025 and be below 4.5 per cent two years later.

"While the interim budget left tax rates on hold, any uptick in planned government spending will need to be accompanied by a higher tax take, either through direct or indirect taxation, to prevent the deficit from widening," Moody's Analytics said.

India's GDP grew an impressive 8.2 per cent in the last fiscal.

Moody's Analytics, however, said beneath the robust headline number, surging government spending masked weak private consumption and investment.

A dull global backdrop kept investment sluggish, with gross fixed capital formation growth slowing in year-on-year terms in the December and March quarters. PTI JD BAL BAL