There is nothing wrong with the budget, as it aligns with India’s long-term growth trajectory. However, the domestic investors had a wide expectation on the budget. Anticipated both revenue and capital expenditure to be increased further and expand the positive vibes built on by the vote of accounts and national election result.
The final budget effectively introduced several macro-based initiatives aimed at job creation, such as skill development programs, internship packages, easier MSME funding, BCD cuts, and enhancements in rural and urban housing. However, overall government expenditure was restrained in line with the interim budget. The government aims to utilize additional inflows from the large one-time RBI dividend and better-than-expected tax collections to reduce the fiscal deficit to 4.9%, significantly lower than the 5.6% projected for FY24.
Accelerating the progress towards the long-term fiscal deficit target of 4.5% is a positive development for India. This is particularly important today, as the inclusion of Indian Government bonds in the JP Morgan Bond Index is expected to enhance the country’s credit rating and boost inflows.
However, it was an opportune moment to address the widening gap between urban and rural income. Demand in the consumption sector has been subdued over the last 1-2 years, highlighting the need to address the lack of demand from the lower-income population. It is essential to address the lack of demand from the masses down the pyramid. The budget would have become much more beneficial if revenue and capex had increased further.
Increase in capital gain tax & STT on F&O is not the issue as it was widely expected that taxes will be increased in the coming years to reduce the gap between capital gain (LT & ST) tax and other sources like salary. Peak effective tax rate of salary above ₹2cr is 37%. The 25% increase in LT is unlikely to impact investors outlook to invest the growing Indian equity market generating above than inflation returns. However, the 33% increase in STLG (20% from 15%) and STT in F&O could have a negative effect on the short-term investor’s sentiment, in the near-term.
Along with fiscal prudence the major triumph of the budget is reduction in customs duty, which will bolster manufacturing sectors such as mobiles, electronic, capital goods, gold, aquaculture (feed and shrimp), solar panels, and batteries. Another benefit is that a pro-growth & fiscal budget is taken positively by the FII’s. The budget has clicked all the objectives by providing a robust outlook suggesting a nominal GDP growth of 10-11%, abolishing angel tax, rapid reduction in fiscal deficit, nope out of box populist measures and fall in government debt.
However, due to the lack of new developments, the rating for the 2024-25 budget is considered neutral and is viewed as a non-event for the market. The recent strong rally of the market flued on high expectations make the background sceptic from point of a domestic investor, in the short-term. The valuations are high and Q1 results are subdued till date curbing positive direction.
Going forward, the market is expected to play align with the performance of the ongoing Q1FY25 results, which have so far been weak. The Nifty50 PAT growth from the 23 results announced is -2% YoY, below expectation. The same company last quarter has provided a YoY growth of 6% in Q4FY24. Sustenance of the premium valuation will be gone on stake if earnings growth slows.
First published in Mint
