The Union Budget was presented amidst the backdrop of worries over global growth in CY23. The key variable being the monetary tightening by global central banks in order to reduce demand and in the process inflation. With exports accounting for nearly 22% of Indian GDP, any slowdown in global growth can hurt Indian economy also. Amidst this global uncertainty, we believe the budget has managed to deliver a balancing act.

The budget continues the growth journey on the broad map laid down by the government. We are on the path to gain the third-largest economy status in this decade. Government is working on a growth path that is healthy (fiscal balance, external balance), inclusive, capex-led (infrastructure as well as corporate capex), supported by digital infrastructure (transparency, ease of business, preventing leakages using Aadhaar) and environmentally sound (focusing on renewables and new-age technologies like electric vehicles, hydrogen, etc.).

Fiscal prudence -- a pre-requisite for a healthy economy -- is back on track from Covid-led diversion. Reasonable assumptions; nominal GDP growth at 10.45%, tax revenue growth at 10.5% and a moderate divestment target of Rs 51,000 crore make 5.9% fiscal deficit target look realistic. Expenditure growth led by investment/capex creation improves the quality of fiscal deficit.

Budget continues the push for capex by government on infrastructure and enabling corporate sector to drive private sector capex by a combination of policy initiatives and incentives. From government spend perspective, the budget has allocated capital investment outlay to Rs 8.6 trillion, ~3% of GDP and 33% year-on-year growth. Major areas of spend being transport infra projects, traditional (rail, road, airport, etc.), as well as modern (high-speed rail), green hydrogen mission, energy transition & net zero emission, Ladakh renewable power grid and river-linking. Affordable housing, another driver of growth from economic as well as social policy perspective continues to get resource allocation from Budget. Similarly, the focus remains on Jal Jeevan Mission to improve the water availability and aims to improve the quality of life.

On external balance front, government has been taking targeted actions to systematically reduce import dependency. PLI & Aatmanirbhar Bharat agenda has a clear focus on export promotion and import substitution, while benefiting domestic manufacturing. Extension of lower income tax rate for new manufacturing units and rationalization of custom duty to plug the gap between input materials and final products may help increase the competitiveness of the domestic manufacturing. Similarly, Budget has placed emphasis on promotion of domestic travel & tourism by aiming to create 50 tourism destination on PPP mode. Tourism is a big forex earner for many economies and given India’s rich cultural heritage, we can also aspire to gain our rightful market share in world tourism.

Purely from financial market perspective, no changes to capital gains tax regime could be the key highlight. Reduction in personal income tax rates, adds to spending power for tax payers and can support consumption. Changes in taxation regime on insurance policies (non-ULIP) with aggregate premium of over Rs 5 lakh is perhaps aimed at removing arbitrage across investment products. The Rs 10 crore-cap on deduction in capital gains on purchasing new residential property may impact in select pockets of residential property market.

From domestic growth perspective, we believe that the RBI is closer to the peak of rate hike cycle. Although rate reversal cycle might not be immediate outcome as it is linked to how other central banks evolve their stance. With budget not having any major changes in policy directions, we expect the markets to revert to normalcy of earnings, valuations and liquidity. While corporate earnings remaining reasonably on track for FY23, the outlook on FY24 remains a function of global growth as well as interest rates. From a valuation perspective, Indian markets have been trading at a premium that is broadly consistent with past trends. The challenge perhaps lies in the fact that some of the emerging markets, including China are trading a reasonable discount to their own long-term trends and this perhaps makes India less attractive at present to global investors, who are focussed on near-term valuations. From a domestic investor perspective, focus on relative valuations across sectors would help as markets would focus on pockets of valuation comfort. As seen in past 12-15 months, quick sector rotation could dominate market behaviour.

For Indian economy, the big picture clearly is the journey to getting to the third-largest economy status which could see economy nearly doubling in size and this growth is likely to permeate across sectors and market caps (large, mid, small) as companies strive for profitable growth and create wealth for investors. We believe increasing exposure to equities in a disciplined manner with the objective of staying invested for longer-term could support wealth creation for investors.