Budget to boost confidence of global investors and rating agencies on the India story

• It’s gratifying that the government assured it will not diverge from the original spirit of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
  
  
• Willingness and ability to invest comes from higher disposable incomes. Budget 2023-24 has taken several initiatives to boost disposable income levels of the Indian tax payers.
  
  
• The capex outlay of ₹10 trillion and the railway capex allocation of ₹2.4 trillion is likely to be value accretive for several sectors like cement, EPC contractors, railway wagons, signalling systems.
  

Stock markets expect a macro environment that promotes economic growth, without stretching the fiscal deficit. The Union Budget managed this tightrope rather well. Budget 2023-24 reiterated the first advance estimate of FY23 GDP at 7%, which positions India as the fastest-growing large economy. The Union Budget announced an agricultural credit target of ₹20 trillion for FY24, in a bid to boost agricultural growth and farm incomes, while the capex outlay has expanded 33% to ₹10 trillion or 3.3% of GDP. Effective capex is ₹14.5 trillion or 4.5% of GDP.

If growth is one side of the story, the other side is fiscal conservatism. The FM confirmed that FY23 will see the government sticking to its 6.4% fiscal deficit target. Along expected lines, the fiscal deficit for FY24 has been cut by 50 basis points to 5.9%. Budget has also provided a glide path to reach a 4.5% fiscal deficit by 2025-26. This glide path should serve to boost the confidence of global investors and rating agencies about the India story. What is gratifying is that the government has assured it will not diverge from the original spirit of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

More disposable income in the hands

One of the key triggers of capital market robustness is the willingness and ability to invest. That comes from higher disposable incomes. Budget 2023-24 has taken several initiatives to boost disposable income levels of the Indian tax payers. The budget has acceded to the long standing demands of raising basic exempt incomes. While the Budget did not alter the rebate system, it has raised the basic exemption limit to ₹3 lakh and effectively made income up to ₹7 lakh fully tax-free. This would still be in the form of rebate and subject to signing up for the next tax regime.

Budget 2023-24 has sought to make the new tax regime more attractive by raising the basic tax free income. While most exemptions are being done away with, standard deduction will continue in the new tax regime. This is likely to make the new tax regime more attractive and also put more disposable income in the hands of people. The Budget also addressed the demands of higher income groups by cutting the peak effective tax rate from 42.7% to 39%, to bring it closer to global benchmarks. The above tax changes are likely to have a positive impact on capital market robustness.

Sectoral gainers from Union Budget 2023-24

There are several gainers from Union Budget announcements.

• The capex outlay of ₹10 trillion and the railway capex allocation of ₹2.4 trillion is likely to be value accretive for several sectors. These include manufacturers of cement, EPC contractors, railway wagons, signalling systems etc.
  
• Investment of ₹75,000 crore in 100 critical transport infrastructure projects will boost steel, aluminium and logistics companies. The ₹10,000 crore outlay for urban infrastructure and higher focus on affordable housing will benefit cement, construction and home finance.
  
• The government decision to set up 100 labs to develop applications for 5G services will be positive for telecom and fibre optic companies. The enhancement in agricultural credit limit to ₹20 trillion will be a boost for Indian companies into seeds, tractors, farm equipment etc.
  
• The reduction in customs duty on acid fluorspar will benefit fluorine chemistry players while the focus on organic and micro farming will boost fertilizer and agrochemical companies. Reduced import duties on shrimp feed will benefit shrimp farming companies while lower customs on lithium ion equipment will favour new age battery companies.
  

Overall, this is a growth oriented budget with focus on fiscal prudence. Both consumption and capex, the twin engines of growth are set to fire. This is a twin engine budget.

(The author is the Chairman of IIFL Securities)