Debt markets would probably be the balancing equation to equity markets’ reactions. Should the fiscal deficit see extra pain from an excessively inflationary budget, sovereign yields could be hardened as debt issuance would increase to bridge govt. revenues and expenses. Rupee could see an uptick should the current account deficit (CAD) see some relief if the Budget announces initiatives for export-oriented sectors.
The FY23 Budget presented in CY22 was hailed as positive by markets. It had strong elements of permanency in economic growth as much of the expenditure was deployed on a balance-sheet basis, said Rajesh Cheruvu, Managing Director and Chief Investment Officer at LGT Wealth India.
“Arguably, business models based on the expansion of the balance sheet on the fixed asset side can be construed to have a higher enterprise value rather than a simple expansion of reserves or cash accretion. This is because there is the belief that fixed assets should, over time, churn out better overall business returns than cash if deployed correctly,” he said.
“Expansion of reserves (without fixed assets increasing) could mean that the business is more transaction-focused (i.e. relying more on the profit & loss to feed the balance sheet directly). Hence, the FY23 Budget, which focused on balance sheet expansion, brought cheer to market participants. The Government has lived up to the CAPEX spree, with FYTD23 investments meeting the pro-rata FY23 expectations. There has so far been a slew of CAPEX announcements, projects tendered and even awarded, and participation from the private space has been very vigorous,” Cheruvu added.
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Expectations
“The FY24 Budget could entail a similar continuation of capitalized growth. To fund this, the government had, during FY23, collected windfall gain taxes on certain export-oriented goods like steel and oil in a bid to first allow the domestic economy to avail of those goods where prices had sky-rocketed as inflation reared its head. The government is also finally seeing the fruits of good execution of GST, wherein Rs 1.5 lakh crore is the new psychological monthly barrier to breach.”
According to Rajesh Cheruvu, in terms of cutting revenue expenditure, the Free Food Scheme (under Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY)) ended on December 2022. This was implemented by the Government of India in response to the COVID-19 pandemic, under which it has been distributing 5 kilogram of wheat or rice per person per month to eligible beneficiaries. So, some relief on subsidies like food and fertilizers can be expected in FY24. Hence some relief to the fiscal deficit can be expected given that capital expenditure should continue its uptrend in FY24 BE, he said.
“Disinvestments of PSUs can be expected at around the same levels as in FY23 BE, i.e. Rs 50,000 crore of which Rs 28,300 crore has already been executed in H1FY23. Railway, shipping-related, and a few defence-related PSU companies have seen successful disinvestments by the government recently via OFS and IPOs. Per BSEPSU, the Government has nearly Rs 2 lakh crore locked up in PSUs and hence should the government concentrate on its core activities, then it would make sense to divest these stakes, especially to the private sector where inroads have been made by them already,” he added.
“India gains a lot should it advance its TFP (Technology Factor of Production), which are low-hanging fruits. Developed economies have already done this, and India should likely stand next to benefit from this tailwind. The significant interest could be highlighted in building India’s digital stack, like regulating Crypto assets. India in FY23 BE had introduced taxes on VDAs (Virtual Digital Assets), but that possibly led to a flight of capital from domestic VDAs to foreign VDAs. The Govt. could come up with taxation reforms in this space,” Rajesh Cheruvu further said.
“Sectorally with expectations of the FY24 Budget to remain capex-oriented, industrial and infrastructure should remain in focus. Power, railways, shipping, defence and roads remain favourable sectors. Enabling sectors like the BFSI space (issuance of credit), autos and talks of budgetary allocations for Li-Ion battery re-cycling should also see some sustained top-down tailwinds. While not seeing many material direct benefits from the Budget, the Insurance sector could see a few announcements to help improve its market penetration. Even otherwise, the government has been providing sector-specific impetus through the year basis the needs without waiting for the Budget.”
“Equity markets look for some continuation of financial support in the Budget. A sell-off in related sectors could likely ensue should the Finance Minister under-deliver or unnecessarily put in the extra fine print for the Budget’s new announcements.”
“Debt markets would probably be the balancing equation to equity markets’ reactions. Should the fiscal deficit see extra pain from an excessively inflationary budget, sovereign yields could be hardened as debt issuance would increase to bridge govt. revenues and expenses. Rupee could see an uptick should the current account deficit (CAD) see some relief if the Budget announces initiatives for export-oriented sectors,” Rajesh Cheruvu said.
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