CAD & inflation concerns may subside in coming months

The blueprint for a sustainable economic route has been suggested in the Union Budget 2023–24, which is based on inclusive development and infrastructure play.

Image for representational purpose. (Express Illustration)

Given that budget was set against a challenging macroeconomic and geopolitical backdrop and a pre-election year budget, the finance minister  maintained a good balance between fiscal discipline and growth. The blueprint for a sustainable economic route has been suggested in the Union Budget 2023–24, which is based on inclusive development and infrastructure play. The budget has proposed effective measures for advancement with the increased capital outlay and financial discipline, continuing on the road of fiscal consolidation. With a strong focus on infrastructure, manufacturing, health, agriculture, green initiatives, and inclusive growth, the Finance minister has made brave and forward-looking pledges.

While the overall fiscal stance is modestly pro-cyclical in the coming year, a capex boost is quite welcome, significantly when private sector demand may be slowing in the coming year amid faltering exports and rising cost of capital. The credit cycle may also face resistance, but a comforting factor is that the financial sector’s balance sheet is in good shape. Also, we expect current account deficit and inflation concerns to subside over the course of 2023. These factors should keep macroeconomic vulnerability concerns under check. 

The government’s assumptions for revenues for FY23 and FY24 appear reasonable, with a tax revenue growth of 12% and 10% for FY23 and FY24. Capex growth of 33% is a big positive surprise from the budget, and the Centre’s ‘Effective Capital Expenditure’ is budgeted at Rs 13.7 lakh crore, which will be 4.5% of GDP. The government has done a decent job of resisting the temptation to be populist in a pre-election year.

The country currently has over 100 unicorns– the extension in tax benefits till 2024 is bound to positively affect the growth of existing start-ups and the initiation of new ones. Additionally, 39,000 compliances have been reduced, and 3,400 legal provisions have been de-criminalised, which will undoubtedly make the country a better hub for start-ups.

The funding under the MGNREGA scheme has gone down; the budget has reduced the outlay under the scheme by ~33% from the revised estimate of INR 894 bn for FY23 to INR 600 bn for FY24. At a time when rural markets are already struggling due to the macro-economic environment. But beneficial reforms are introduced to promote agri-startups - an Agriculture Accelerator Fund is set up, which will attempt to implement cost-effective solutions to problems encountered by farmers by introducing contemporary technologies and boosting output. 

Sectoral/Stocks impact

• Large government capex outlay push on a high base will be positive for infrastructure and capital goods stocks, while the acceleration of green transition (INR 350bn) would be positive for green energy stocks. 
• Infusion of INR 90 bn for revamped credit guarantee scheme to boost MSMEs enabling additional collateral-free guaranteed credit of INR 2 trillion is positive for MSME lenders.
• The government has put a cap of INR 10 crores on the capital gains on which deduction will be available, which is slightly negative for high-end real estate developers. 

NIKHIL KAMATH
Co-founder, Zerodha