Interim Budget 2024-25: A Quantum Perspective

Fiscal prudence, continued capex spending, green growth and status quo on direct and indirect taxes were the key highlights of the Interim Budget FY 2024. The full budget will be presented only in July 2024, by the government that comes to power. Explore perspectives on the budget from the CIO and our fund managers, who analyze key takeaways for Equity and Bond Markets.

There was an expectation that given it’s an election year, the budget could tilt more populist with more support for rural sector. However, contrary to expectations, the government continues to be driven by development and fiscal prudence as the central focus.

Given the economic growth momentum, there was need for assuring macroeconomic stability which has been judiciously crafted to give way for fiscal consolidation. The lower tax collection assumption could either be conservative or government signal to assume some growth moderation going forward. The government continues its capital expenditure spending with focus on Inclusive development with Agri, Infra (including housing) and Green ecosystem as the key thrust areas with an emphasis on Research and Technological developments.

There was a need to support manufacturing momentum and way to revive rural economy. However, probably that could be part of the main budget that gets presented in July as government plans to showcase a pathway for Developed India.

• Despite being a pre-election budget, absence of major populist measures is a positive.
• The government has focused on fiscal consolidation which will ensure macro stability.
• The expectation was that the government will set the fiscal deficit target at 5.2%-5.4% of GDP in FY 2024-25. Better than expected fiscal deficit of 5.1% could ease system liquidity and lower funding cost.
• Budgeted estimates for the capex in FY23-24 have been revised down by 5%. Adjusting for these changes, capex growth is broadly in line with nominal GDP growth.
• The Budget plans to elevate the capex allocation for the upcoming year by 11.1% to Rs 11.1 lakh crore, constituting 3.4% of the GDP. The proposed increase in capex, primarily targeting infrastructure enhancement, may lead to heightened credit demand for banks, particularly PSU Banks, in the coming years.
• Government’s focus on housing will impact stocks in steel, cement, real estate and power sectors positively.
• Rural recovery has been quite subdued in the recent past. Cut in Food subsidy (-3.3% YoY), Fertilizer subsidy (-13.2% YoY) and flat outlay on MNREGA could have implications on rural economy.
• Government’s continued thrust on the capex front will benefit companies within industrial and capital goods.
• FM's focus is on infrastructure, tourism, logistics and innovation in research. All these measures will bring continuous sustainable growth of the economy.

Overall, the Government is on a fiscal consolidation pathway and continued infra spends would support the broader economic growth in the long term.

As expected in an interim budget, the budget was neutral for equity markets.

What investors should do:

Keep return expectations anchored

Equities remain as an attractive asset class to generate returns that exceed inflation over the long term. However, after a great year of equity returns, valuations across the board are looking expensive, Hence, investors should moderate their return expectations in the near term. Investors can allocate to equities with a long-term view and a staggered approach.

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This is a very good budget for the bond market as the government chose fiscal prudence over populist spending. The budgeted fiscal deficit of 5.1% of GDP is lower than even the lowest of market estimates.

Faster fiscal consolidation and consequent decline in the government’s market borrowing should drive bond yields lower and bond prices higher.

Another positive aspect is that the government has pegged only a moderate growth in the non-capex expenditure. This should keep inflation under check and provide enough headroom to the RBI to cut interest rates.

Bond yields went down around after the announcement with the 10-year government bond yield falling 7.14% to 7.06%.

What investors should do:

We expectlong term bonds to do well in 2024.

Investors can capture this opportunity with dynamic bond funds which are invested in long term bonds. Dynamic bond funds stand to benefit from fiscal consolidation. Dynamic bond funds have the flexibility to change the portfolio positioning as per the evolving market conditions.

Investors with a short-term investment horizon and with little desire to take risks should invest in liquid funds which invests in government securities and does not invest in private sector companies which carry lower liquidity and higher risk of capital loss in case of default.

For detailed Fixed income view, please click here.

Source: Budget Documents, Quantum Internal Research  

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Above article is authored by Quantum.

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