The Finance Minister of India will present the Union Budget for FY23-24 on 1st Feb 2023, the last full-year Budget before the Union Election 2024. With the government undertaking most of the reforms outside the Union Budget purview, its impact on the equity market has reduced over the past few years. Nonetheless, the market participants continue to view it as a critical catalyst that stimulates the growth of the Indian economy and, thereby, the Indian market.
What Do Historical Trends Say?
In the last 8 budget sessions of the current government, Nifty closed positively on 5 occasions on the budget day while closing on a negative note for the remaining 3. This time, the Union budget has gained utmost importance as the tightening monetary policy and elevated inflation have challenged the purchasing power of a large population section in the country.
Nifty Returns on the Union Budget DayOver the past two pre-election year budgets, the government shifted its focus on increasing its Capex spending, giving a significant thrust to infra spending for accelerating the development of the country’s foundational infrastructure. Furthermore, it has put more emphasis on various public welfare schemes.
Budget expectations and factors that would have a positive bearing on the market:
Higher Capex spending for FY24: We expect Budget 2023-24 to be a growth-oriented budget with higher Capex spending, given the elections lined up in over nine states in 2023. The overall focus of the budget is likely to be on job creation and investment-driven growth, which would give notable impetus to the country’s infrastructure development. It may include public infrastructure Capex towards roads, water, metro, railways, defence, digital infrastructure, and green technologies. Though private Capex has been sluggish for the last several years, we expect it to receive the much-needed push in the upcoming budget. Moreover, the manufacturing sector may get a further boost as the base of the PLI scheme is likely to broaden beyond the 13 sectors. Policy measures and fresh investments in the development of Agri and allied activities, along with rural employment schemes, are here to stay and are expected to gather pace moving forward.
Support for SMEs and MSMEs to drive credit growth: The Indian economy stands in a sweet spot of growth and remains the land of stability against the backdrop of a volatile global economy. The Indian banking system is in better shape, when compared to pre-Covid levels, with a stronger balance sheet, improving asset quality trend, and lower provisioning. Credit growth has picked up in the last couple of months, and we believe more stimulus is expected in the Union Budget to augment it further. This push would come with additional support to SMEs and MSMEs and more action plans for private Capex that have remained sluggish for a long time. Moreover, the budget would likely set a roadmap to build and bolster the entrepreneurship culture of our country.
Higher rural spending: In light of tightening monetary policy and the elevated level of inflation impacting the purchasing power of a large section of people in the country, we expect the budget to provide some relief for the affected people at the bottom of the pyramid. The Government has continued to extend its support to this section by proactively providing food and fertilizer subsidies. Moreover, with the rural economy still not showing a sign of 100% recovery to pre-Covid levels, higher rural spending is likely in the upcoming budget with more focus on affordable housing and employment.
Fiscal consolidation: We believe the government’s priority will continue to achieve and maintain macro stability by adopting a fiscal consolidation path. We believe the focus will continue to be on fiscal consolidation by maintaining the right balance between growth and inflation.
What could make the equity market more volatile?A full-fledged populist budget or a significant increase in subsidies may impact the government’s fiscal consolidation roadmap, leading to a correction in the Indian equity market. Any significant increase in the borrowing program may also increase the long-term bond yields. Hence, the market will continue to eye the borrowing program.Lastly, any discussion on harmonizing long-term and short-term capital gains taxes across investment instruments may bring additional volatility to the Equity market. We would keep a close tab on the government’s stance on this move.
Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities
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