This remarkable balancing act has been made possible by the buoyancy of tax revenues, which in turn has been helped by the strength of nominal GDP growth in the latest couple of years. Last year’s big increase in public investment has indeed helped to bolster fixed investment spending in the past half year, as evident in capital goods output and imports both growing strongly, providing a crucial spur to the economy.
Fiscal prudence & tax relief
On the fiscal front, abundant prudence is displayed with the glide path on reducing fiscal deficit being complied with, and the fiscal deficit is targeted to go down to 5.9% in FY24E versus 6.4% in FY23. The medium-term target of a 4.5% fiscal deficit by FY26 is also on track.
Importantly, the budget provided some ease to middle-class taxpayers under the new tax regime and gave no negative surprise on long-term capital gain taxes. Additional cash of ₹35,000 crore has been put in the hands of the Indian taxpayers through this measure. Where will they spend it? We see beneficiaries across swathes of discretionary consumption industries and also hope that part of this amount goes into their savings and asset creation as well.
Capex Boost & Job Creation
Many of India’s infrastructure, particularly in airports and ports, today can be compared favourably with their global counterparts, and in some, like waterways and roads, there is scope for improvement. The government recognises this need to build capacity and infrastructure, which leads to a virtuous cycle of private capex, increased consumption, job creation, and overall economic and social growth.
The budget’s spending priorities are focused on boosting the green economy, encouraging investment (with the government leading the way for the second consecutive year), continuing to speed up the infrastructure build-out, boosting opportunities for youth through skilling and enhanced education spending, the rollout of new digital public infrastructure for farmers, and ‘reaching the last mile’ by enhanced social service provision to the most vulnerable communities and regions.Capex spending remains the key area of focus with government capex allocation growth of 33% YoY in FY24BE to ₹10 lakh crore, led by sectors like railways, roads, defence, housing, water and metro projects. The capex to GDP is pegged at an all-time high of 3.3%. The budget also signals India’s enhanced commitment to a green economy, as an integral part of its leadership of the G20 this year. Key initiatives here include the allocation of ₹19,700 crore to reduce dependence on fossil fuels, ₹10,000 crore investment in creating 200 compressed biogas plants, and a major focus on green hydrogen, and these will have a multiplier effect across the value chain.
With rural allocation to major schemes unchanged, it is indicative government’s focus on driving income consumption through job creation rather than direct transfers merely through welfare schemes. The focus on job creation through the rationalisation of duties for electronic components and the extension of production-linked incentives (PLI) to multiple manufacturing sectors would also have a positive impact on consumption.
Debt market to look up
The budget has further boosted the outlook for the Indian debt market. The fiscal deficit and the borrowing estimate were largely in line while for continued fiscal glide path over the next two years is also positive. Debt markets like other asset classes perform in cycles. The last two years saw average debt funds delivering a return of around 4%, while in 2019 and 2020 it delivered around 10% return. The interest rate cycle is likely to peak out in the next few months globally and in India, it may peak out with probably the last rate hike of 25 bps. Since higher return in the debt market is made when investments are done near the peak of the rate cycle, the year 2023 could mark the comeback year of debt markets in India as well as globally.
India a global bright spot
Amid an imminent recession in the western world, India’s domestic demand is ensuring that its economy stays resilient – and most likely sustains the fastest growth in the G20. With inflation set to continue moderating, India is also positioned to cut interest rates within the next half year – sooner than most other economies – given that inflation is likely to stay within the RBI‘s target range, falling below 5% YoY by July. That, in turn, should generate stronger real GDP growth (we pencil in 7%, versus the government’s 6.5%) in FY24, continuing the virtuous circle of stronger growth-boosting tax revenues, lowering the fiscal deficit and thereby crowding-in private investment – the key to productivity-led medium growth momentum.
The writer is CEO, ICICI Securities
