The pros and cons of the budget, in a nutshell

While markets have been scaling new highs month after month, the Union Budget 2024-25 has not gone down very well with investors. Markets were widely anticipating measures to boost employment, rural focus, capex trajectory and steps to improve MSME (Micro, Small & Medium Enterprises) health. While one can debate if the quantum of announcements was sufficient, the Budget touched on all these aspects. Key negatives for the market were the change in capital gains tax rate and limited measures to boost consumption.

Pros of Budget 2024

• Employment and Skill Development:

Employment is key to sustainable economic growth and the long term consumption story of India. Apart from measures to boost employment for the new workforce, grooming them to be industry ready is critical. The government’s launch of three schemes to address employment and skilling in the country with an outlay of Rs 2 trillion over four-to-six years, is set to bridge the gap in skills needed by industry. A package is announced to provide internship in the top 500 companies to ten million youth partly funded by the government from CSR funds. Though budget allocation for these schemes at INR 100 bn looks miniscule relative to the announced figure, it is a step in the right direction.

• Rural Focus:

Overall central government allocation on rural areas has increased by 10 per cent after three years of almost flattish allocation. This includes allocations from both budgetary and non-budgetary resources to MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Scheme), Agriculture, Irrigation, Rural Roads, Affordable Housing and National Social Assistance. The budget boost along with good progress in the monsoon augur well for a revival in the rural economy.

Steps are positive for overall FMCG & Consumer Discretionary especially companies with exposure to rural India.

• MSME (Micro, Small & Medium Enterprises)

While the listed larger companies had a good earnings trajectory in the past few years, the same wasn’t true with MSME. While their contribution to the profit pool is limited, MSME is a large employment generator. Hence the Budget measures to facilitate loans and double the MUDRA loan (Loans extended to small/micro units) limits of MSMEs to Rs 2 million imply better financial inclusion for MSME.

These measures augur well for banks and NBFCs with MSME exposure. Some of the proposed measures such as credit guarantee schemes do address some of the risk in lending to MSMEs.

 

• Capex Trajectory

The market was keenly observing if the current regime would shift from its capex focus, especially with pressure from regional coalition partners. But there are no major changes in the capex outlay from the interim budget for FY25, it has grown at a healthy pace of 17 per cent year-on-year. It’s noteworthy given that regional coalition partners could demand new transfers to their states.

 Cons of Budget 2024

• Change in Capital Gains Tax Rate:

There have been multiple rounds of changes in capital gains tax and dividend taxation right from 1992. Though India continues to be an attractive investment destination, it is critical to have stable capital gain tax rates. While it is prudent to control excessive speculation by way of increase in tax rates on risky instruments like derivatives, frequent increase in long term and short-term capital gains tax rates could negatively impact India’s external image as an investment destination.

• Limited measures to boost consumption

The supply side incentives given to corporates by the government in the past few years have not led to a material pickup in private sector capex. It was desirable for the government to adopt measures to boost consumption. There were income tax changes in the new tax regime which could lead to marginal reduction in tax outgo. These steps are insufficient for a widespread push to consumption.

Conclusion

The budget is almost identical to the interim budget barring some announcements related to job creation, tax changes and lower fiscal deficit. While the Government has indicated its intent to address key issues of the economy, these measures may not materially change the earnings trajectory for companies.

George Thomas is Fund Manager- Equity at Quantum AMC