Union Budget 2024: A trio of fiscal constraints, market optimism and high expectations

“It was one of those March days when the sun shines hot and the wind blows cold: when it is summer in the light, and winter in the shade” - The Great Expectations

Replace March with July and this quote from Charles Dickens’ famous book perfectly sums up the great expectations from Modi 3.0 Budget. Markets have run up 5 per cent over the past one month, pricing in continuation regarding manufacturing expansion and infrastructure development. Meanwhile, the larger population is awaiting announcements on tax relief, agriculture reforms, and higher employment. Modi 3.0 is caught between shining sun and chilling wind as it must appease everyone while also maintaining fiscal deficit route to 4.5 per cent by financial year 2026 (FY26).

A big ask this time is for a reduction in direct taxes or an increase in the standard deduction to ensure more disposable income for individuals. Additionally, there is a call to index tax slabs to inflation. Currently, salaried taxpayers benefit from a standard deduction of Rs 50,000. An increase in this deduction could potentially enhance savings and stimulate spending among the middle-class population.

Despite India’s robust overall gross domestic product (GDP) growth of 8.2 per cent for FY24, private consumption growth remained subdued at 4 per cent, the lowest in two decades outside of the pandemic year. It is yet to catch up to pre-pandemic average of 6.3 per cent in 2019.

So, some incentives to taxpayers will broad base urban consumption and discretionary trends in coming quarters. We believe sectors like fast-moving consumer goods (FMCG), two-wheelers, passenger vehicles, housing, building materials, durables, travel, quick service restaurant (QSR), and retail will benefit from demand revival.

Speaking of demand, there is a huge demand for jobs. According to CMIE data, unemployment rate has risen to 8-month high of 9.2 per cent in June. Thus, there is anticipation of enhancements in the Production Linked Incentive (PLI) scheme along with a focus on the micro, small and medium enterprises (MSME) sector, particularly employment-related sectors.

Further on the rural front, we anticipate subsidy increase for key inputs, increased outlay on agriculture for modernisation, along with changes to the Minimum Support Price (MSP) policy and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) payments.

The upcoming budget is also expected to prioritise healthcare, aiming to boost government spending in this sector, which currently stands at around 3 per cent of GDP. One of the key initiatives anticipated is the expansion of the Ayushman Bharat Scheme to encompass more sections of society.

When it comes to real estate, the key ask is changing the definition of affordable housing. Currently, the government defines affordable housing with a carpet area of 60 square metres and value below Rs 45 lakh. Homebuyers feel this is impractical in metros like Mumbai and Bengaluru. There is also an ask to release government land for affordable and mid income housing.

Coming to capital markets, the focus will be on announcements pertaining to railways and defence. We expect higher allocations for aircraft, engines, and vehicles. Ministry of Defence will also continue its thrust on exports, having announced a ~Rs 50,000 crore defence export target by FY29.

For railways, we expect sustained focus on upgrading rail infrastructure & capacity (rolling stock, electrification, freight corridors, high-speed rail, metros, etc.), focus on speed upgradation (Vande Bharat, Vande Metro, Namo Bharat, etc.), and improving safety (Kavach anti-train collision system).

Renewable Energy, Energy Transition and decarbonisation will remain a key theme in the budget, with continued capacity additions across solar, wind, hydro, nuclear, etc. to meet the target of 500GW RE capacity by 2030.

So the wishlist from Modi 3.0 Budget definitely runs long, with assembly elections fast approaching in Maharashtra, Jharkhand, Jammu & Kashmir, and Haryana. I can best sum this up in a small poem:

As budget nears, we watch the polls,
In states where Modi Ji had lofty goals.
Uttar Pradesh and Maharashtra’s call,
The voters’ trust, he seeks to install.
What can he do to win them back,
To put them firmly on his track?
Money in pockets, the tested way,
To sway their hearts, come what may.
Tax cuts for the middle class in sight,
Housing schemes to make things right.
Aspiring youth in tier 3, tier 4,
Yearning for a life with more.
Monsoon’s boon, the fields will thrive,
With government aid, their hopes revive.
Traditional incomes on the rise,
With added incentives, they will surprise.
FMCG’s future, bright and clear,
A six-month horizon, we hold dear.
In this landscape, opportunities blend,
A promising path, around the bend.

By Vikram Kasat, Head of Advisory, Prabhudas Lilladher