Budget 2023: Higher capex, lower taxes; positive for equity markets 

The budget's emphasis on capital expenditure will have a multiplier effect on the economy.

Union Budget 2023 is the Narendra Modi government’s first budget of Amrit Kaal. In the last nine years, India's economy has grown to become the world’s fifth largest from the 10th.

This budget's emphasis on capital expenditure will have a multiplier effect on the economy. The Economic Survey expects India's Gross Domestic Product (GDP) to grow in the range of 6-6.8 percent, maintaining its tag of being the fastest-growing economy in the world.

Finance Minister Nirmala Sitharaman has also provided a credible road map to bring down the fiscal deficit, targeting it at 5.9 percent of GDP in FY24.

The government has been innovative in delivering an effective budget, emphasising capital expenditure, the rural economy, social sectors, offering policy incentives and subsidies, and stressing tax/growth buoyancy.

The world has recognised India's economy as a bright spot in an uncertain global environment. India's growth, pegged at 7 percent in the current fiscal year, is the highest among major economies of the world. All factors clearly indicate that India is on a progressive path and that the country's future growth prospects are bright.

The budget speech focused on key announcements for hard-working middle-class income-earners, women, and the youth. Overall, it was a good budget, and we remain optimistic about the Indian economy.

Budget 2023 was likely to have been a tightrope walk, considering its fiscal guidance and next year’s general elections. Muted nominal GDP growth (due to a global slowdown and a low deflator) would have constrained tax revenue and government spending, compared to the strong pace in the last couple of years.

Nevertheless, the fiscal path in FY23 through an across-the-board expansion had been expected and was delivered.

We had anticipated a continued focus on Aatmanirbhar Bharat to enhance manufacturing and exports while managing imports, sustainability in terms of a supply/demand push towards renewable energy and alternative technologies, and infrastructure expansion with the focus being on defence, railways, ports, logistics, roads and so on. This budget met with all these expectations bang on!

We expect to see support to bond yields with the government's net borrowing at Rs 12.31 lakh crore  and a market borrowing target of Rs 11.8 lakh crore.

The capex targets largely met  expectations. For FY 24, the revenue expenditure growth assumption excluding subsidies is very meagre at 1 percent, which is commendable. The capex growth of 33 percent is the high point of the budget. The government seems very serious about enhancing capital formation in the economy—lower than FY23 subsidies by Rs.1.50 lakh crore (from Rs.5.5 lakh crore in FY 23 to Rs. 4 lakh crore ). The reduction in subsidies will generate some scope for other rural and social expenditure. The tax growth estimates look reasonable at 11.7 percent due to the nominal GDP growth assumption of 10.7 percent.

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We are not very upbeat on non-tax revenues budgeted for FY24 as the disinvestment target has been pegged again at Rs. 51,000 crore and the increase in government dividend from the financial sector at  ~20 percent. The personal income tax cuts and redefining slabs in the old regime would lead to a reduction of 20 percent in tax outgo for several assessees. Reducing the highest surcharge rate from 37 percent to 25 percent is a welcome change for the super-rich.

We retain our overweight stance on cyclicals, whereas the discretionaries will lag. Savings parked in tax savings products through high-value premium collections for insurance (now taxed) is a negative for insurance companies. On the other hand, the National Calamity Contingent Duty (NCCD) of 16 percent on cigarettes is manageable and is positive for tobacco companies.

Sectorally, the Budget is positive on cement (higher spending on PM Aawas Yojna and higher capital outlay), affordable housing (higher spending in PM Awas Yojna ).

It is also bullish on power utilities (transmission line for evacuating renewable energy from Ladakh: Rs 20,000 crore capex, including viability gap funding of Rs 8,000 crore; the line is to be executed by Power Grid Corporation), autos (replacement of old government vehicles and ambulances with new ones and chemicals (Rs 9,000 crore lower duty in fluorspar positive for fluorochemical companies.)

Motilal Oswal is MD & CEO, Motilal Oswal Financial Services Ltd. Views are personal and do not represent the stand of this publication.