The central government presently derives 63% of its resources from taxes (Direct Taxes 36% and Indirect Taxes 27%). 27% comes from borrowing and 10% from other sources.
The present socio-political milieu is such that (i) the central government is becoming increasingly dependent on the regional parties, hence it is imperative that it would need to allocate more resources to the states ruled by the supporting regional parties; (ii) a larger proportion of the population is becoming increasingly dependent on the government for the basic necessities like food, shelter, education and healthcare, requiring the basic social sector spending to rise without any major improvement in the quality of life; (iii) supply side pressures are not abetting, keeping the inflation (including imported inflation) elevated, pressurizing USDINR and yields; and (iv) economic growth continues to be disproportionately dependent on government spending (both revenue and capex).
Under these circumstances, the government shall continuously be under pressure to augment its revenue. The challenges it faces are — (i) personal tax rates are already stretched; (ii) actual number of income tax payers is consistently declining despite decent rise in the IT return filers; (iii) corporate tax hikes at this stage will send wrong signals to the global investors; (iv) GST rates are widely anticipated to be moderated; (v) disinvestment process has totally derailed and not expected to come on track anytime soon due to the political rhetoric; (vi) dividend from CPSEs is close to peaking; and (vii) FRBM targets require deficit cuts putting a cap on additional resource mobilization through borrowings.
The investors need to contemplate from where the government will attempt to raise the additional resources in the coming years to sustain public spending. The answers may have material implications for the investment strategy and market direction post Budget in February 2025.
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