Expectations from the upcoming budget and how should market participants react

This article is authored by Deepak Jasani, Head of Retail Research, HDFC Securities.

The forthcoming Union Budget due in July 2024 could continue the roadmap laid out in the previous Budgets barring a small course correction. It could largely retain the revenue and expense projections made in the interim Budget (except for the windfall dividend from RBI).

This additional receipt from the RBI could be used to i) cut the fiscal deficit target to 5 per cent for FY25 from 5.1 per cent in the interim budget thus reinforcing the inclination to stick to fiscal consolidation; ii) make higher transfers to states for capex spend iii) increase transfer under PM KISAN from Rs.6000 p.a. to Rs.7500 p.a. iv) provide incentive to income tax payers to shift to the new tax regime by providing higher standard and other deductions/higher exemption limit/changes in tax slabs.

While there exists a fear among investors about the probability of the Government turning populist in the Budget post the recent poll outcome, we feel that the recent announcements of ministerial appointments and modest MSP hikes negate such a fear. The Government is likely to shun the race of competitive populism through handouts and is not likely to abandon the path of fiscal prudence although it may make extra efforts to win over a larger population of rural and urban poor by incurring targeted social welfare spending.

It may want to protect its image of being a responsible, clean Government, cutting wasteful spending, eradicating corruption, bringing more transparency by reducing off-budget items and maintaining fiscal prudence.   

The Budget could bring benefits to several sectors, including affordable housing, Industrials/Engineering, Consumer goods etc. Some sectors like IT and Pharma may be left largely untouched. The NDA 3.0 has already announced the decision to help 3 crore additional rural and urban households for the construction of houses.

The Government realises that coalition politics could make it more difficult to undertake legislation on the more ambitious reform agenda in areas like agriculture, land, labour and judicial, which are anyway out of the Budget.

The Union Budget could see the government paving the way for foreign-domiciled Indian startups to flip their corporate headquarters back to India — via the special economic zone of GIFT City — with minimal tax implications and to woo other companies to the Gift city with tax breaks and other sops.

The MSME sector could receive special mention by way of measures to ease capital raising and relaxing norms in NPA recognition by Banks. Banks could get a leg up in deposit mobilisation by way of enhanced deduction for interest receipts by depositors. Agri revival could be a major thrust in the Budget and provisions may be made for rationalisation of GST rates on certain agricultural inputs; and enhanced capex may be considered for deployment in rural infrastructure such as irrigation, warehousing and cold chains.

Steps to discourage F&O trading by retail investors could also be announced in the budget or ahead of it. The Government may announce its intent to divest some stake in low-float PSU stocks as they are seeing a valuation bubble although the divestment target may not be hiked majorly.  An Employment Linked Incentive scheme for labour-intensive sectors like toys, textiles, furniture, tourism, logistics, small retail and media & entertainment may also be announced.

We don’t think that there would be any major changes to the capital gains tax although we do not rule out higher tax burden in some form on the urban rich.

While proposing the above, the Government may be aware of the fact that some measures may benefit certain sectors at the expense of some other sectors or the ultimate consumers.

Investors could trade in the stocks in the sectors expected to benefit listed above ahead of the budget as current market levels mean that investments in them may have to wait till after analysing the fine print of the budget. They may also want to take part profits off the table from their portfolio (especially in stocks that have run up massively in the past few quarters) and raise cash to deploy it later on dips.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.