With cut in income taxes, which will mainly benefit the middle class, demand for consumer discretionary items is likely to revive in urban areas, Ashutosh Tiwari, Managing Director & Head of Institutional Equities at Equirus said in an interview with Moneycontrol.
According to him, while growth in government capex is coming down, likely at 7% in FY25 as per revised estimates, if this experiment (cut in income taxes) works, one might see a revival in private capex, which is always more efficient and productive for growth revival.
Post cut in personal income tax, the biggest beneficiary sectors of demand revival will be consumer durables, autos and retail sectors, said Ashutosh who has over 10 years of experience in equity research and 3 years in manufacturing.
Further, he ruled out a rate cut in the February policy meeting by RBI. "The reason is still a lot of tariff uncertainty which is impacting currency," he said.
What is your rating out of 10 for the budget, and why?
The government has tried to address one of the biggest concerns emerging in the economy over the last few quarters – consumption, especially urban consumption. With cuts in income taxes, which will mainly benefit the middle class, demand for consumer discretionary items is likely to revive in urban areas. While growth in government capex is coming down, likely at 7% in FY25 as per revised estimates, if this experiment works, we might see a revival in private capex, which is always more efficient and productive for growth revival. The government remains committed to fiscal prudence with Fa iscal deficit estimate of 4.8% in FY25 and 4.4% in FY26. We believe it’s a decent budget and would rate in the upper quartile.
Which sectors will receive the major boost post-budget?
One of the biggest measures taken in the budget is a reduction in personal taxes. A person with an income of Rs 10 lakh will see a tax reduction of Rs 50,000 and someone having an income of Rs 24 lakh will save up to Rs 1,10,000 versus the current tax regime. We believe that these savings will boost consumer discretionary spending of the middle class and will help revive urban demand which has been languishing for the last 1.5-2 years. The biggest beneficiary sectors of demand revival will be Consumer durables, Autos and retail sectors. A pick-up in these sectors will also revive the credit growth of lenders focused on discretionary items.
Do you foresee a strong boost to the consumption sector after this budget?
Government spending in rural increased during FY25 through DBT (direct benefit transfer) or other measures and therefore rural consumption has been healthy during the year so far. In the budget also, the government remains committed to rural with schemes like a ‘Prime Minister Dhan-Dhaanya Krishi Yojana’ in partnership with states, the ‘Rural Prosperity and Resilience’ programme to enhance rural incomes, and projects to enhance yields and productivity. Boost to middle-class incomes through a reduction in personal taxes will also help revive urban demand as almost 1lac crore more will be left in the hands of taxpayers through this reduction. All these initiatives will provide a big boost to consumption in India.
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Post-budget, do you expect the RBI to act by kick-starting the interest rate cut cycle in the February policy meeting?
We do not expect RBI to start the rate cut cycle in February but rather in April. The reason is that there is still a lot of tariff uncertainty which is impacting currency. For rates, RBI has done its bit via liquidity infusion and OMOs (open market operations) which has helped to bring down the liquidity deficit and in this way delivered an implicit rate cut. Alongside, historically narrow interest rate differential will further be unsupportive for any rate cut.
We would expect RBI to hold on and assess the evolving conditions before taking any rate action as it could exacerbate the currency situation. Growth drivers while needing support could be given via other means. Imported inflation from the currency front could worsen the growth-inflation dynamics. In summary, we expect RBI to wait and watch on prudence.
Has the capex plan met your expectations?
Government capex spending was lower till November as the April-November capex was down ~12% YoY, it got big boost in December which helped the 9-month capex increase ~2% YoY. Therefore, it was expected that government's earlier estimate of Rs 11.1 lakh crore for the full year FY25 would be cut and it has now been revised to Rs 10.18 lakh crore, which if achieved will be ~7% higher than FY24. For FY26, the government has budgeted capex of Rs 11.2 lakh crore, a growth of 10% versus FY25 revised estimates.
Next year capex in rail and roads will be flattish however defence will increase. While government capex growth is moderating, if estimates are met, we believe that it will be reasonable growth as the government has taken big cuts in income tax rates to revive growth through consumption.
How do you interpret this budget concerning the equity markets? Is the budget providing a clear direction to the market?
Slowdown in consumption especially urban consumption has been one of the biggest concerns for the market over the last few months. Rural was recovering through the year, so it wasn’t a big worry. Through the tax cuts, the government is trying to revive consumption which is positive for the market. Private capex is always more efficient than public capex which was not seeing big revival while the government was doing its bit through government capex to boost economic growth. Exports were also not supportive in the last year due to a slowdown in Europe and other markets. The cut in income taxes led to demand revival can eventually lead to a revival in private capex as well.
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