Daily Voice | This investment advisor expects manufacturing push, supply chain recast to be priority in Budget 2023

Being the pre-election year budget, some populist measures are on par for the course. That said, the government aims to adhere to its deficit targets. The focus of the past few budgets has been on capital expenditure and one could reasonably expect the same to continue.

Enhanced allocation towards rural employment schemes and focus on developing rural infrastructure could see greater attention, given the fact that the rural piece has yet to emerge out of the scars of Covid on the economic front.

Which are the five critical issues you think the government should address in the Union Budget FY24?

The Union Budget FY24 is likely to be on similar lines like the previous budgets of this government where there will be a focus on capital expenditure. The market will also expect the government to provide clarity on the fiscal consolidation path.

Given the general elections scheduled next year, we also expect to see an increase in rural and welfare spending as seen in the earlier pre-election budgets. Rural employment, housing, education and healthcare are likely to be in focus.

We expect the manufacturing push (through PLI) and supply chain reorientation to be a priority in the budget.

The government has not been able to rationalise personal income tax slabs in the last few years due to the fiscal slippage on account of Covid. Given the weakness in discretionary consumption and persistent inflation, some relief in the form of enhanced standard deductions would be much desired by the salaried class. In addition, higher deduction for interest on home loans would be welcome, given the rising cost of borrowings and increasing cost of new homes.

Hence, expectations are for a well thought-out middle-of-the-road approach towards balancing the books in FY24.

Do you think the RBI is unlikely to be dovish until the core inflation stabilises below 6 percent, though CPI inflation dropped to 12-month low?

While the CPI inflation for December 2022 fell to a one-year low, core inflation continues to be above 6 percent (6.1 percent for December 2022). The Monetary Policy Committee (MPC) also mentioned the sticky nature of core inflation during its last meeting.

We expect that the MPC will hike rates at least one more time, most likely by 25 bps in February, before pausing and holding rates in the foreseeable future. Further actions by the central bank will be data dependent and also influenced by actions of other global central banks.

How do you see the reopening of China? Do you think it could be one of the key reasons for India's underperformance?

The reopening of China is an important event, given the sheer size of its economy and what it means for global trade and commodity prices. The Chinese markets have significantly underperformed global markets over the last few years. FIIs had pulled out huge sums of money from Chinese markets given the Zero Covid policy and lack on any clarity on when the country would open up. That said, the pace of opening up has caught most market participants by surprise. This could lead to FII increasing allocations to China and a mean reversion trade playing out that benefits Chinese markets.

India has been one of the best-performing markets globally in the last calendar year and has several tailwinds to support its domestic growth and positive outlook. While there may be some rebalancing of flows in favour of China in the near term, India should also be able to attract its fair share of FII flows.

Are you bullish on the healthcare space? Is it the time to bet on these stocks?

We are positive on pharma companies that are focusing on the domestic market and are also positive on hospitals. Our view is neutral on pharma companies focusing on exports as well as on diagnostic companies.

Is it the time to bet on cement space considering the expected boost to infrastructure spending by government?

With expectations building that the Union Budget for FY24 will lay greater emphasis on fostering domestic growth amid the global slowdown, impetus on infrastructure and revving up the rural economy – we believe stocks related to Capital goods, infrastructure, affordable housing are likely to do well. Post budget performance of these stocks depends on whether budget offerings have met with the expectations.

Do you think the better second half over first half will help the market post at least 10 percent return for 2023?

While it is difficult to quantify a number, we expect market returns to be at least in line with the nominal GDP of the economy which itself is expected to be in the early teens. That said, equity markets do not go up or down in a linear fashion. It is better to look at returns over a 2-3 years time horizon at the minimum.

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