The Union Budget 2024 delivered a prudent balance between capital expenditure, fiscal prudence and welfarism, said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. As Finance Minister Nirmala Sitharaman presented the Budget FY25 on July 23, the government continued with its focus on spending in core infrastructure areas, while expenditure on certain social welfare schemes was under control.
Per the analysis report by Kotak Institutional Equities, the Budget balanced well the priorities of elevated capital expenditure, employment generation, agriculture and rural development and fiscal consolidation.
What were the key financial highlights of the Budget? (1) 16 per cent growth in receipts and 7 per cent growth in expenditure, leading to a fiscal deficit of Rs 16.1 trillion, (2) Rs 5.5 trillion of non-tax revenues, (3) Rs 500 billion of divestment-related revenues and (4) revenue expenditure growth of 6 per cent and capital expenditure growth of 17 per cent. The growth rates are on the base of FY2024RE. The FY2025BE GFD/GDP is pegged at 4.9 per cent, marginally lower than the interim budget estimate of 5.1 per cent.
Kotak Institutional Equities said that the projected fiscal deficit target at 4.9 per cent for FY25 is realistic, driven by 13 per cent increase in direct taxes (12 per cent increase in corporate tax and 14 per cent increase in personal taxes), 8 per cent increase in indirect taxes, and upward revision of non-tax revenues (due to incremental Rs 1.3 trillion transfer of surplus by RBI).
It further stated that the bulk of the increase in spending has been allocated to revenue expenditure driven by targeted increase in 1) transfer to states, 2) job creation, 3) rural housing, and 4) price stabilization. The government maintained its focus on capital expenditure, with a budgeted growth of 17 per cent in FY2025BE to Rs 11.1 trillion, which is the same as in the interim budget.
RBI to embark on a shallow rate cut
In line with this, Kotak Institutional Equities said that a dovish global monetary policy cycle and moderating domestic inflation (toward the 4 per cent mark) will provide the RBI with the scope to embark on a shallow rate cut cycle. “We expect the 10-year benchmark yield to be in the range of 6.70- 7.1 per cent in FY2025E,” the report stated.
The ECB started off with its first rate cut in June 2024 while the Fed remained on a pause with the dot plot indicating one rate cut in CY2024 against three earlier. The Fed will likely start with its rate cut cycle from September and the market has high confidence in the three rate cuts of 25 bps each by the Fed in September, November and December. India’s inflation trajectory, meanwhile, has seen some upside in June due to a transient spike in vegetable prices though it will likely revert and center around the 4.5 per cent mark. This suggests that the RBI will have scope to start off on a shallow rate cut cycle.
Now, which sectors will have an impact from the announcements on taxation?
The government’s sector-specific proposals largely pertain to 1) supporting rural and urban housing, 2) buybacks being taxed as dividends, 3) changes in capital gains taxation across multiple asset classes, 4) custom duty changes for multiple sectors, 5) higher outlay for clean energy, etc.
Here are possible implications on few of the sectors:
Automobiles & Components
The budget outlay for PLI scheme for automobiles and auto components to enhance manufacturing capabilities for advanced automotive products in India has remained unchanged at Rs 35 billion in FY2025BE compared to interim budget. This, Kotak Institutional Equities said, will have no incremental benefit, however it added, its positive for adoption of electric vehicles as the companies are incentivized to invest on new technologies, which could possibly lead to higher launches at better price.
Further, capital expenditure outlay has been pegged at Rs 11.1 trillion, unchanged when compared to interim budget. This, it said, is likely to support the growth of CV segment demand.
Also, the government revised income tax slabs and increased the standard deduction limit to Rs 75k from Rs 50k for personal income in the new tax regime resulting in lower income tax payouts. This, per the report, can aid in improvement in demand for entry-level vehicles.
Banks/Diversified Financials/ Insurance
The budget announced import duty on gold decreased to 6 per cent from 15 per cent earlier. Per the report, lower duties will lower INR gold price leading to lower loan growth and reduce margin of safety (LTV) on existing loans. As such, this change is negative for gold loan NBFCs.
The budget also allocated Rs 40 billion for credit-linked subsidy scheme under PMAY-U. Kotak Institutional Equities said that while the allocation is lower than expectations but can be revised upward later. Affordable housing focused HFCs with a higher share of urban salaried borrowers are likely to benefit.
Further, increase in STCG and LTCG on equity and equity-oriented mutual funds will lead to higher tax burden on investors.
Building Products
According to analysts at Kotak Institutional Equities, an increase in target for number of homes under PMAY in addition to higher allocation to both PMAY (U) and PMAY (G) bodes well for the building products demand.
Consumer Durables & Apparel
Under PMAY 2.0, housing needs of around 10 million urban poor and middle class families will be addressed with an investment of Rs 10 trillion (including Rs 2.2 trillion central assistance in next five years) along with a provision of interest subsidy to facilitate loans at affordable rates. PMAY (U) FY2025 budget raised to Rs 302 billion (from Rs 262 billion in FY2025 interim budget and Rs 221 billion in FY2024RE). This will prove to be positive for manufacturers of wires and electrical appliances.
The budget also announced the reduction in custom duty on gold and silver from 15 per cent to 6 per cent. Per analysts, the reduction of gold price by around 9 per cent is likely to help revive demand. Also, competitive pressure would ease as unorganized / smaller players who were sitting on inventory gains would be significantly impacted by this inventory loss. And organized players such as Tanishq would be impacted by one time inventory loss on gold metal loan but easing competitive pressure would help.
Further, the budget announced measures to facilitate employment, skilling, and other opportunities for 41 million youth over a 5-year period, with a central outlay of Rs 2 trillion. This will be positive for consumption sentiment and FMCG companies.
Also, the increase in standard deduction by 50 per cent to Rs 75K and tweaked tax slabs sill be positive for consumption sentiment and FMCG companies.
Hotels & Restaurants
The budget talked about the promotion of tourism through development of new road corridors, and setting up of tourist centers (Odisha, Nalanda, Rajgir, etc.). This will help promote tourism as a key focus for development and this augurs well for the hospitality sector including companies such as Lemon Tree and Indian Hotels, Kotak Institutional Equities said. The budget also increased allocation for the AMRUT scheme, which per analysts, is positive for players such as Ashoka Buildcon, KEC, KPTL and L&T to benefit, as they already have a presence in these areas.