Union Budget 2023-24 on expected lines, good for investment push

The Budget contained a few negatives for specific sectors, and will require a review of long-term tax planning for high net-worth individuals but it could have a broadly positive impact. The hike in tax collected at source (TCS) on foreign payments to 20 per cent may impact cash-flow for companies that pay for services or products abroad. It will also impact investments abroad, since the Liberalised Remittance Scheme will also incur this TCS.

All insurance income where premium is over Rs 5 lakh is also liable for taxation, which has led to a selloff in the insurance sector. The high-end segment of the housing sector may suffer some lack of demand with the capping of capital gains offset at Rs 10 crore. 

On the positive side, there’s a massive increase in capital expenditure to Rs 13 trillion. Defence has got roughly Rs 6 trillion, and the rail and road ministries around Rs 2.5 trillion each. There will be 100 critical transport infrastructure projects for connectivity to ports for coal, steel, fertiliser, and food grains. Some Rs 75,000 crore will be invested on a priority basis, including Rs 15,000 crore from private sources. In addition, there’s revival for airports to improve regional connectivity. Another Rs 10,000 crore may be used to improve urban infrastructure in Tier-II and -III cities. All this pre-supposes private sector investment and participation.

This is all good for the nascent Indian military-industrial complex, and for the EPC, heavy engineering and construction firms on these chains. It should also lead to better offtake for steel, cement and other construction materials. The related aerospace sector may also see movement though most of the players there are startups.

The Budget-related push to develop a bigger artificial intelligence footprint could end up creating some new revenue streams but concrete details are unclear. Reduced customs duty on an array of raw materials would be good for multiple industries.

Fertiliser subsidies, which hit Rs 2.25 trillion due to the rise in feedstock (natural gas) prices after the Ukraine War, are being cut to Rs 1.75 trillion. The job-guarantee scheme, MGNREGA, sees a 30 per cent cut to Rs 60,000 crore. Both moves seem good in principle because they release resources for the infra push. However, given an agro economy which has been under pressure, subsidy reductions could lead to lower rural/semi-urban consumption demand. Balancing that off, there’s a thrust to increase bank credit to agriculture. This might drive consumption and activity though history suggests agro-sector loans tend to be write-offs.

Only two sectors, FMCG and IT, made gains on Budget day, when price movements were also muted due to the Adani factor. Looking back at the last month of trading, FMCG, auto and private banks are gainers in that period. State-run banks which have done really well in the past year are now seeing a reaction, while IT has also seen a sell-off in the last month.

The Budget thrust doesn’t change the Reserve Bank of India’s tighter monetary policy stance due to high inflation expectations, and the fiscal deficit will also remain high in 2023-24. Government borrowing will hence cause an overhang on the bond markets.

In an election year, fiscal deficits usually tend to expand beyond targeted levels, so the net government borrowing assumptions are serious underestimates. We can see a situation where interest rates continue to rise at least for a while and there will be increasing caution about banks and NBFCs as rates rise. But demand for credit will also rise as the economy continues the post-Covid recovery.

Investors in the automobiles sector are clearly betting on big ticket consumption improving, including commercial vehicles. Another interesting area is the Infrastructure space, which includes cement and metals producers, in addition to construction and engineering companies. Apart from ACC and Ambuja Cements which have been hit by the Adani factor, the other cement companies are doing well in terms of price moves and there’s been a technical stabilisation of prices across the other cement companies.

Metals is another interesting space. The global commodity cycle is muted because of lower demand. But the domestic infrastructure push should push the demand for steel, copper and other industrial metals. There could be plays here if the metals cycle is near its lowest levels.

The Budget is about as good as can be expected in terms of the investment push. The tax-related provisions are somewhat negative. The technical situation with the Nifty is unclear. Its current levels are just about 2-3 per cent above the 200-Day Moving Average and below the 50-DMA and below the 20-DMA. This suggests that the short-term and intermediate trends are bearish but the long-term trend may hold up. There’s been 7 per cent retraction from the all-time high.