Our Analysis of the Union Budget 2023-24

The Union Budget was presented amidst the backdrop of worries over global growth in CY23. The key variable being the monetary tightening by global central banks in order to reduce demand and in the process inflation. With exports accounting for nearly 22% of Indian GDP, any slowdown in global growth can hurt Indian economy also. Amidst this global uncertainty, we believe the budget has managed to deliver a balancing act.

The budget continues the growth journey on the broad map laid down by the government. We are on the path to gain the third-largest economy status in this decade. Government is working on a growth path that is healthy (fiscal balance, external balance), inclusive, capex-led (infrastructure as well as corporate capex), supported by digital infrastructure (transparency, ease of business, preventing leakages using Aadhaar) and environmentally sound (focusing on renewables and new-age technologies like electric vehicles, hydrogen, etc.).

Fiscal prudence -- a pre-requisite for a healthy economy -- is back on track from Covid-led diversion. Reasonable assumptions; nominal GDP growth at 10.45%, tax revenue growth at 10.5% and a moderate divestment target of Rs 51,000 crore make 5.9% fiscal deficit target look realistic. Expenditure growth led by investment/capex creation improves the quality of fiscal deficit.

Budget continues the push for capex by government on infrastructure and enabling corporate sector to drive private sector capex by a combination of policy initiatives and incentives. From government spend perspective, the budget has allocated capital investment outlay to Rs 8.6 trillion, ~3% of GDP and 33% year-on-year growth. Major areas of spend being transport infra projects, traditional (rail, road, airport, etc.), as well as modern (high-speed rail), green hydrogen mission, energy transition & net zero emission, Ladakh renewable power grid and river-linking. Affordable housing, another driver of growth from economic as well as social policy perspective continues to get resource allocation from Budget. Similarly, the focus remains on Jal Jeevan Mission to improve the water availability and aims to improve the quality of life.

On external balance front, government has been taking targeted actions to systematically reduce import dependency. PLI & Aatmanirbhar Bharat agenda has a clear focus on export promotion and import substitution, while benefiting domestic manufacturing. Extension of lower income tax rate for new manufacturing units and rationalization of custom duty to plug the gap between input materials and final products may help increase the competitiveness of the domestic manufacturing. Similarly, Budget has placed emphasis on promotion of domestic travel & tourism by aiming to create 50 tourism destination on PPP mode. Tourism is a big forex earner for many economies and given India’s rich cultural heritage, we can also aspire to gain our rightful market share in world tourism.

Purely from financial market perspective, no changes to capital gains tax regime could be the key highlight. Reduction in personal income tax rates, adds to spending power for tax payers and can support consumption. Changes in taxation regime on insurance policies (non-ULIP) with aggregate premium of over Rs 5 lakh is perhaps aimed at removing arbitrage across investment products. The Rs 10 crore-cap on deduction in capital gains on purchasing new residential property may impact in select pockets of residential property market.

Equity Market Outlook

From domestic growth perspective, we believe that the RBI is closer to the peak of rate hike cycle. Although rate reversal cycle might not be immediate outcome as it is linked to how other central banks evolve their stance. With budget not having any major changes in policy directions, we expect the markets to revert to normalcy of earnings, valuations and liquidity. While corporate earnings remaining reasonably on track for FY23, the outlook on FY24 remains a function of global growth as well as interest rates. From a valuation perspective, Indian markets have been trading at a premium that is broadly consistent with past trends. The challenge perhaps lies in the fact that some of the emerging markets, including China are trading a reasonable discount to their own long-term trends and this perhaps makes India less attractive at present to global investors, who are focussed on near-term valuations. From a domestic investor perspective, focus on relative valuations across sectors would help as markets would focus on pockets of valuation comfort. As seen in past 12-15 months, quick sector rotation could dominate market behaviour.

For Indian economy, the big picture clearly is the journey to getting to the third-largest economy status which could see economy nearly doubling in size and this growth is likely to permeate across sectors and market caps (large, mid, small) as companies strive for profitable growth and create wealth for investors. We believe increasing exposure to equities in a disciplined manner with the objective of staying invested for longer-term could support wealth creation for investors.





Data as on January 31st, 2023

The Balancing Act

An economy on a strong footing amidst a global uncertainty; an argus eye on ensuring the growth impulses remained intact; a promise towards fiscal consolidation: The Union Budget was presented amidst this backdrop, and it certainly delivered the balancing act.

The Budget math:

Every budget tends to be the proverbial Curate’s egg; partly good and partly not so good. We look at both ..

The Good
  • The Finance Minister continued the commitment towards the glide path of reducing the fiscal deficit as the Fiscal deficit is projected to improve to 5.90% of GDP from 6.40 % of GDP in the current Financial Year and also reiterated the intention to bring the fiscal deficit below 4.5 per cent of GDP by 2025-26.

  • The revenue projection math looks achievable: The Government is projecting a Overall tax revenue growth of 12.09 % in FY24 Budget over FY23RE with Corporate and Income Tax growth assumed at 10.50%.

  • Government’s projection for FY24BE nominal GDP growth at 10.45% assuming a real growth around 7% appears reasonable.

  • Over the years the quality of expenditure has shown a remarkable improvement: Effective Capital Expenditure by Fiscal Deficit has moved from 23% in FY21 to 52% in FY22 Actuals to around 75% FY24BE which essentially implies that the incremental Government borrowing is funding investments / capital expenditure.

  • While the supply side measures have always been a force multiplier to the growth , cuts in personal income tax levels in this budget provided the much needed demand side fillip.

The Apprehensions
  • Interest payments to net revenue receipts of the Central Government is around 41 % for 2024 BE. This was around 37% in 2021 actuals and has continued to inch up through the years. As we move ahead, the focus would be on widening the tax base and compliance to reverse this trend.

  • While there has been an decrease in the subsidy estimates, such estimates could always be vulnerable to the Geo Political situation.

  • The Fiscal deficit continues to rely on small-savings scheme mobilisation to fund the deficit . However, a key driver of flows into small savings scheme in the past was the attraction of much higher interest-rates on these schemes compared to the banks' deposit rates. This difference has reduced now as deposit rates have caught up, which could challenge the reliance on elevated small savings fundings next year and pose upside risk to eventual issuance targets.

  • States have been allowed additional 0.5% of state GDP debt issuance limit for next year, which can potentially add further supply. But the extent of utilization of this limit would depend on states' capital expenditure.

Debt Market Outlook

The Bond markets rallied as borrowing program of the Central Government was around the street estimates. While the Central Government borrowing looks large , the fact that it conformed to the what the market expectations were , provided a succor to the bond markets . The markets attention will move to the US Fed and RBI MPC meeting later this month.

We believe that the RBI is close to the terminal repo rate policy. And with RBI projecting an inflation of 5 % in June 2023, the probability of the 10-year heading lower exists. Fixed income indices which measure the Gilt returns show that a 5-year monthly returns (XIRR) is around 4% with the average return around 7%. We believe that returns broadly mean reverse and thus there exists a probability of the 10 year to deliver a positive surprise in this calendar year. With China opening up resulting in a recent surge in commodity prices ; we believe that a possible economic uncertainty in US and Europe may put a lid to the recent rally , thereby capping any potential upsurge in inflation.

And the all important question: What should the Investor Do ?
  • We believe that investors could move up the Risk continuum. We believe the carry and possibility of a RBI pause merit investments in fixed income funds.
  • We believe that the investors with a shorter time horizon of less than one year may continue investments in ultra-short term and low duration funds.
  • Short term fund category may be suitable for investors looking to stay for a time horizon beyond one year with a lower risk volatility.
  • For a long investment horizon and with a suitable risk appetite, an allocation to Dynamic Bond fund merits attention.

Data Source:




Data as on January 31st, 2023


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