Policy continuity and staying the course as regards aggressive fiscal consolidation (4.9% of GDP versus 5.1% in the interim budget) were the key tenors that front-lined the Budget presented by Modi 3.0 government. The tilt for capital expenditure continued, with total allocation retained at INR 11.11tn (versus interim budget) even as more funds were made available primarily for youth employment generation and skill development.
Macro stability, core intent
The core intent was to maintain macro-stability by targeting aggressive fiscal consolidation, thus allowing space for the monetary policy to respond, by easing policy rates and eventually preparing for rating upgrade. The new norm for evaluating fiscal prudence (as and when announced) will be debt-GDP ratio, per the Finance Minister rather than fiscal deficit. This will allow the fiscal deficit to settle above 3% in the medium term as long as debt levels consolidate. Note that FRBM Act, instituted in 2003, set ambitious targets for debt reduction, aiming to limit the general government debt to 60% of GDP by 2024-25 from 82.5% actually.
Employment generation schemes to churn out formalization
Employment generation linked incentive schemes with the internship programs are mainly meant to boost formalization of labor. If executed well, the template could well prop formalization of labor force, which in turn bodes well for long-term and sustainable consumption lift up and higher pool of credit-worthy borrowers. We estimate even if 50% of the target of the 'First Timers' scheme announced in the budget were to be achieved, it would be capable of creating 38% higher EPFO enrollments each year with annual gains of INR 5,000 to INR 10,000 per year per annum for the new employee.
Retrained populism unlikely to lift consumption meaningfully
K shaped consumption has been the key fault-line in post-Covid economic recovery paradigm. The recent electoral verdict moreover had created expectation of an enhanced transfer to rural and urban poor. While the budget did prop those under the new tax regime (INR 17,500) and through job creation schemes, the allocation towards rural-focused sectors fell by 0.3% versus FY24 (RE).
Shift in PSU disinvestment strategy trims overhang on PSU stocks
Holistic capital management with respect to PSUs is the 'new mantra' that has replaced 'disinvestment focus'. The PSUs' dividends, capital expenditure by the CPEs, and value creation by Central Public Sector Enterprises (CPSEs) suggest that strategic and non-strategic disinvestment of CPSEs is not government priority for now. As such, we expect government to drive its capex strategy aggressively through CPSEs in sectors such as power, oil & gas, railways and defence. With pipeline of projects remaining intact through budgetary support and policy continuity amid balance sheet strength and core profitability improvement, we expect select PSUs to remain in favour such as OMCs upstream oil & gas companies and utilities.
Market strategy: Focus back to earnings growth
The equity markets were disappointed amid the hike in short-and long-term capital gains tax and removal of the indexation benefit for property and gold. But with the top 100 active equity funds sitting on 3.2% cash, any correction in the market is likely to see deployment of cash.
Even though capital expenditure was retained, the initial euphoria in sectors such as Aerospace & Defense, Railways, Infrastructure, and Shipbuilding is expected to temper as focus shifts from enthusiasm to execution. Hereon, rate cut cycle and earnings growth should become key drivers for the markets.
Expect earnings CAGR for the next two years at 18%, and with the Nifty trading at peak valuations (21x 12-months forward P/E), the market may undergo a time correction until fundamentals catch up with the price.
We prefer large-caps over mid- and small-caps and like Autos (2W), Agrochemicals, OMCs, Private Banks and Utilities, which have earnings lever and adequate margin of safety. Given that the rate cut cycle is around the corner globally, rate-sensitive sectors such as IT and Real Estate look lucrative. Healthy growth in US generics business also leads us to prefer pharma sector.
Other key areas of budget
Skilling and employment high on government agenda
Unsurprisingly, employment generation, skill development were key focus areas of FY25 Union Budget. Note India's unemployment rate and jobless growth have been concerns for decades, regardless of political regime/policy.
Per our analysis, a 1% rise in unemployment rate in India leads to a 0.4% drop in real GDP. So, the labor market needed redressal. The government will implement three employment-linked incentive schemes as part of PM's package - encompassing enrolment in EPF, recognition of first-time employees and support to employees/employers.
Separately, the focus was also on students who were unable to gain from government schemes. The government has announced financial support for loans up to INR 1mn for higher education in domestic institutions. Related e-vouchers will be directly issued to 100,000 students every year for annual interest subvention of 3% of the loan amount.
Bihar and Andhra Pradesh get their due share
It was the first time a coalition government presented the budget since 2009. And tensed expectations of fiscal profligacy so as to appease the coalition was put at bay by the Finance Minister. The Budget accommodated the needs of the allies without compromising on fiscal deficit.
Per FM's speech, Bihar saw an overall allocation of INR 589bn towards roads and bridges (44.1%), power plants (36.3%), and irrigation projects (19.5%). The government will also support the development of road connectivity projects, namely: (1) Patna-Purnea Expressway, (2) Buxar-Bhagalpur Expressway, (3) Bodhgaya, Rajgir, Vaishali and Darbhanga, and (4) additional two-lane bridge over river Ganga at Buxar, at a total cost of INR 260bn.
Power projects, including a new 2,400MW power plant at Pirpainti, will be set up at a cost of INR 214bn. Accelerated Irrigation Benefit Programme and other sources will provide financial support to projects with an estimated cost of INR 115bn - the Kosi-Mechi intra-state link and 20 other ongoing and new schemes, including barrages, river pollution abatement and irrigation projects.
Comprehensive development of 17 Vishnupad Temple Corridors and Mahabodhi Temple Corridors will be supported, modelled on the successful Kashi Vishwanath Temple Corridor, to transform them into world-class pilgrim and tourist destinations. A comprehensive development initiative for Rajgir will be undertaken along with support for developing Nalanda as a tourist centre.
Andhra Pradesh was allocated INR 150bn, to be sourced via multilateral entities. Grants for backward regions - Rayalaseema, Prakasam and North Coastal Andhra - as per Andhra Pradesh Reorganization Act, will be provided. INR 150 bn is the first tranche of the amount, with greater funds likely to be made available in the subsequent years.
Spotlight on new industries
Shipping, Nuclear and Critical Minerals take centre stage: Interestingly, the budget focused on new sector that are critical for future growth roadmap like Shipping, Flood Management, Nuclear Energy and Critical Minerals.
In the Shipping industry, ownership, leasing and flagging reforms is expected to be implemented to improve the share of the Indian shipping industry and generate more employment. This is a positive move as global freight transit faces increasing challenges.
In Critical Minerals, China has gained first-mover edge and if India's domestic EV and renewable push were to be made successful, processing of critical minerals needs to be encouraged. For the same, the government will set up a Critical Mineral Mission for domestic production, and support recycling of critical minerals as also overseas acquisition of critical mineral assets. Also, customs duties are fully exempt on 25 critical minerals, with basic customs duty reduced for two such minerals. This will boost the processing and refining of such minerals and help secure their availability for these strategic sectors.
In Nuclear Energy, the government will partner with the private sector to: (1) set up Bharat Small Reactors, (2) R&D for Bharat Small Modular Reactor, and (3) R&D for newer nuclear energy tech. R&D funding announced in the interim budget will be made available for this sector. India's recent engagement with Russia on securing long term uranium supply pact ties up with government's focus on enhancing nuclear energy in the country. |
