Union Budget 2023: What stock market investors are expecting from this budget?

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There is an expectation for the Government to increase tax slabs from the existing levels. If that happens, it will leave more disposable income in the hands of consumers, which will boost the growth of the economy. Also, there is an expectation of additional incentives to increase affordable housing. Currently, homebuyers can claim a deduction of up to 2 lakhs on the annual interest paid on a housing loan. In the upcoming union budget, home buyers expect this limit to be increased up to five lakhs.

Talks of a need for a uniform tax structure for capital gains are expected to be discussed in the upcoming union budget. This might help Indian taxpayers to have more disposable income in hand, which can be mobilised into investments and utilised efficiently. Expectations of tax exemption on the interest paid on personal loans and education loans which account for a large share of the credit basket. Burdened by inflation and increasing rates this relief will nurture credit growth and spending.

Food and fertiliser subsidies account for about one-eighth of India’s total budget spending of 39.45 trillion rupees this year, and to control the fiscal deficit that inflated during the pandemic the government might look to cut down. The Society of Manufacturers of Electric Vehicles is seeking an extension of EV subsidies under the FAME-II scheme and the inclusion of light to heavy commercial vehicles to promote electric mobility. We have seen strong credit growth in India and capacity utilisation reaching encouraging levels. To reach a sustained growth of 6-8 per cent, the Government’s Capex is expected to continue.

If we see the trend in the last 2-3 Years, considering the burden of Covid and Global uncertainty in 2022, Economies across the World have increased budgetary expenditures. India too chose the path of sustained recovery of the economy. Banking & Financial Services sector and Capital intensive sectors like Infrastructure, Manufacturing, Capital Goods, Auto, and Healthcare were the key beneficiaries. If we see the last 3 Year data on pre & post Budget movements, we may observe the below pattern.

During 2022 Oil, Energy, Metals, and Banking were the Sectors which saw the highest swing positively, while the IT sector saw a decline. In 2021, the Metals, Energy, and IT sectors saw the highest swing positively, while the Auto, Banking & Financial Services sectors registered the lowest swings. In the year 2020 – Healthcare, Energy, and IT sectors registered the highest swing, while Metals, Auto, Banking & Oil sectors registered the lowest swings. 

We should also keep in mind that the last three years have seen a diverse number of external factors impacting the domestic economy and the budgets were tweaked to ensure the domestic economy thrives despite the uncertainties globally and persistent inflation domestically. The trend for this year is for markets to remain volatile during the first quarter of the year and since the previous budget was focused on infrastructure, and developing India as a manufacturing hub, we expect this trend to continue and additional investments in renewables and reforms to stimulate consumption through consumer durables and electronics. While manufacturing continues to be the focus, India has an edge in the services sector, and the development of services will have a holistic impact on the drivers of growth for the economy.

The previous budget was focused on infrastructure, and developing India as a manufacturing hub, we expect this trend to continue and additional investments in renewables and reforms to stimulate consumption through consumer durables and electronics. Since India contributes to only 2% of global exports currently, the conducive policies are pushing for a manufacturing hub that benefits several sectors like automobiles, chemicals, electronics and engineering goods. 

The responsibility of expanding credit growth rests on the Banking & Financial services sector, and with Private Capex expected to increase in 2023, the sector will continue its rally. An outlay of INR 1.97 Lakh Crores for the Production Linked Incentive (PLI) Schemes across 14 key sectors, to make India a global manufacturing hub was announced previously we expect these sectors to benefit further. With Capex expected to increase, Capital Goods will benefit from investments. With the emphasis on building stronger healthcare systems since the onset of Covid, we expect the Government to continue to allocate towards healthcare. The Government is expected to expand the incentives to the EV sector, we expect buoyancy from the Markets towards the Auto sector. Also, some backlog in terms of sales and increase in demand and easing supply chain issues are driving the sector.

The global economy is poised for a slowdown, and advanced economies reeling under uncertainties are expected to face a recession. At the same time, India is projected to grow at a rate of 6.8 per cent for 2022-23. The interest rates in the US and other economies are expected to peak in 2023, along with the dollar index leading to funds making their way to emerging countries and India being fundamentally strong, with additional measures to be taken by the government supporting growth for the economy. Additionally, free trade agreements with the UAE and Australia too will help attract robust inflows into the sectors that are benefitting due to the broad-based CAPEX by the government.

Sectors that could benefit from the budget

If the Capex targets get increased, as discussed previously, the major sector that will get a boost from a market perspective would be the Banking & Financial services because they will be responsible for the credit growth that would happen. Apart from the manufacturing sector, because of the PLI scheme, Infrastructure, Healthcare, Capital Goods, Auto, Real Estate, and sectors with strong tailwinds like FMCG might benefit from the Budget. The Agri-Tech sector, which has been emerging strong in the previous 3-4 Years, might also take everyone by surprise. 

From the EdTech perspective, increased government funding and support for online initiatives are expected. The upskilling initiative from the Government to holds importance in aligning the changing supply-demand dynamics in the Education sector. The fast-growing EV sector might also get an allocation in terms of more incentives and supporting the battery charging infrastructure to enable more people to change to EV automobiles. There may be some relook at the taxation of Lithium-Ion batteries too in that effect. It would also be interesting to see how the Government sees the fast-growing Digital Gaming sector in this Budget. 

This sector also has the potential to help to alter how new India learns apart from benefiting other sectors like semiconductor, fintech, telecom and IT. There is also the expectation of implementing the National Logistics Policy (NLP) in this Budget. The NLP will ease bottlenecks and reduce costs. India’s logistics cost is around 14% of its GDP. The government may decrease the logistics cost to bring it to par with other developing countries. There is an expectation that the Budget will focus on cost management in the logistics industry and from the MSME sector for an easier line of credit since working capital is an important part of their operations which gets blocked in delayed payments.

Author: Mr. Anil Rego, founder, and fund manager at Right Horizons

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