Since June 4th, the national market has been thriving on a strong foundation. The formation of a stable government and high expectations for the upcoming budget have been key drivers for this rally. Optimism may have grown further when the final budget date was extended to July 22nd, allowing for the preparation of comprehensive amendments. In 2019, the final budget, which followed the national election results, was announced on July 5th.
The wish list is long, representing every industry, farmer, rural & agri economy, and from a common man to a taxpayer. Industry wise, the sectors in focus are manufacturing, renewables, green hydrogen, EV, semi-conductors and electronics. The government is expected to push manufacturing in India with the extension of the PLI scheme to varied sectors, by providing incentives, subsidies in tax and tariff by achieving a specific amount of production and investment. Currently, it is provided on 14 sectors and is expected to increase to include additional categories such as toys, footwear, textile, and millet-based foods. Also, the government has reopened the application window for the PLI Scheme for White Goods, specifically air conditioners and LED lights. Generally, the industry expects the continuity of the pro-commerce policy and improve ease of doing business for FDI.
Similarly, the government is expected to increase spending to enhance infrastructure, and welfare schemes to improve living standards. The primary areas of focus are the rural economy, farmers, and impoverished classes. The rural economy anticipates higher monthly allocations for MGNREGA, increased MSP for foodgrains, better access to fertilizers, and improved public welfare schemes for housing, drinking water, and free food for those below the poverty line. Efforts to boost farmers’ incomes have faltered due to the impacts of COVID-19, weak monsoons and heatwaves in 2023-24. Consequently, job creation, particularly in rural areas, has slowed, leading to higher jobless claims and widening the income gap between rural and urban populations. Additionally, the public expects tax relief to help offset rising living costs. Thus, revenue expenditure is estimated to increase in FY25-26. Other key revenue-based expenditures are Defence, Pension, Education and Interest payment, which are expected to rise.
High revenue expenditures will affect capital expenditures. Major ongoing capital projects include roads, railways, state assistance, grants provided by the Ministry of Finance for projects, defense, telecommunications, and atomic energy. The demand from state governments, driven by alliances seeking special development status, has increased. For instance, Bihar is demanding ₹30,000 cr and Andhra Pradesh is seeking ₹100,000 cr for state projects. But the government is also expected to increase capital expenditure to address future growth.
As both the expectations are mounting, the government must maintain a decorum between freebies, tax subsidies, capital expenditure, and increased tax collection to attain fiscal prudence. The current consolidated deficit of India is forecast at 5.8% in FY24. Much above the long-term target of 4.5%. Given the high amount of dividend from the RBI, i.e. ₹2lac cr, the government has the leeway to address both populist and capitalist measures in the short to medium-term. However, it is also a good time to escalate the approach towards a long-term fiscal deficit to reduce the target to 5.0% in FY25. Many of the benefits being currently discussed in the market may not be delivered in a single document, the anticipated advantages and reformist measures may be addressed over the next 1 to 3 years.
From the stock market’s standpoint, a key expectation is that low long-term and short-term capital gains taxes should be maintained, which seems probable at this time. However, there is also anticipation that these rates could potentially increase in the future, possibly alongside a restructuring between equity and non-equity investments over the coming years.
India is trading at a premium to the other EMs & developed nations by 85% and 23%, respectively. MSCI India trades at a one year forward P/E of 23.3x, above the long-term average by 22%. Recent performance has been robust, with MSCI India posting an 18% gain over the past six months. Given the strong recent performance and high expectations, makes the domestic market temporarily vulnerable to the risks associated with the upcoming budget event.
The author Vinod Nair is the Head of Research, Geojit Financial Services.
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