The Union Budget presented by finance minister Nirmala Sitharaman was well received by the equity markets, mainly as it was not populist, as feared by some, and also due to the growth push on the supply side. She stayed the course set in the previous Budgets, in terms, among others, of spurring investments and spending capex. However, revival of demand seems difficult going by the fact that rural allocation (food and fertiliser subsidy cut and reduced MGNREGA allocation versus expectation of rise) has been cut and interest rates seem to be on the way up due to higher than factored FY23 fiscal deficit and no provision to enable inclusion of India sovereign bonds in global bond indices. This may lead to shift in investments from expensive sectors to cyclicals.
Having said that, the Budget is growth inducing and does the heavy lifting by sharply increasing capital expenditure. The focus on boosting manufacturing as well as an underlying emphasis on areas such as startups, modern mobility and clean energy shows the FM has prioritised long-term growth. A large increase in allocation to roads and bridges from Rs113,875 crore in FY22 RE to ₹180,301 crore is a big jump and can have a trickle-down effect on input industries (Steel, Cement) and improve road infrastructure. However, execution remains the main challenge to reap its full benefits.
Individual taxpayers may feel a bit disappointed with the lack of direct tax cuts but this Budget lays the ground for a multi-year growth. Income tax changes have been minimal except to plug some loopholes, while customs duty rates have seen a large number of changes. This may be due to pressure from the WTO or to correct the inverted duty structure.
Market borrowings are slated grow at 32.2% in FY23 creating pressure on domestic money markets. Interest rates may not fall in a hurry unless the Indian sovereign bonds gets included in Global indices soon.
The FY23 fiscal deficit of 6.4% has come in higher than expectations. Let’s hope the interest rates and inflation do not remain high for long as they have the potential to become spoilsports. Inflation is expected at 3.5-4.5% in FY23. Although the Budget has not laid the roadmap of fiscal deficit for the next two years, the government will pursue a broad path of fiscal consolidation to attain a level of fiscal deficit lower than 4.5 per cent of GDP by FY 2025-26. This seems a daunting task going by the fact that we have elections due in May 2024.
FY22 tax estimates look to be conservative and may be exceeded. This may result in a reduction in fiscal deficit from 6.9% unless offset by unforeseen expenses. FY23 estimates too seem conservative and achievable. Tax to GDP ratio has been rising well over the past few years (10.8% in FY22 vs 9.9% in FY20) following relentless tax reforms by the Govt over the last few years.
Revenue expenditure growth at 4.5% in FY23 is a little lower despite interest expenses growing at 15.5%. Fertiliser subsidy that has been cut in FY23 may overshoot if the commodity prices do not correct.
Whether sufficient solace has been provided to the MSME sector (despite increase in allocation) will have to be seen. This segment has been affected badly in the recent past and is the largest creator of jobs.
Though capital expenditure in the Budget has seen a large jump, import duty has been cut on machinery and project imports keeping the local manufacturers on toes though some cut in import duty on raw materials have also been proposed).
Divestment target of ₹65,000 crore in FY23 vs ₹78,000 crore (FY22 RE and ₹175,000 FY22 OE) seems to be on the lower side. Concrete proposals to tap monetization of assets through National Land Monetisation Corporation are missing though this does not preclude the Govt from going ahead with it during the year.
As far as impact of the Union Budget on the capital markets is concerned, the effect of Budget on the market course will evaporate in a couple of days’ time. We have the global monetary tightening and the RBI policy meet ahead of us. Markets typically feels relieved post Budget as No bad news is deemed to be good news. However, the macro issues and the micro performance will come to the fore soon even as the Q3 results season has turned out to be softer than expected. Technical factor of fund flows from FPIs remain one of the key determinants of the market direction beyond the next few days and in case the FPIs are in an accommodative mood, our markets may keep seeing buying interest time and again while in the absence of such a mood a correction may be in store post a couple of weeks when the negative triggers may come back to the fore.
(Deepak Jasan, retail research, HDFC Securities)
