An informal survey of about 40 market participants, conducted in the past 4 days, indicates that unlike the previous budgets presented by the finance minister Ms. Nirmala Sitharaman, the market’s expectations from the budget to be presented today might be negligible.
In fact, most participants appear to be praying that the finance minister shall skip the investment and capital markets from her budget provisions altogether. No change in capital gains taxation is all they would wish for.
One veteran portfolio manager summarized the broader market sentiment in one simple sentence - “The boat is in rough waters. All that I could wish for is that FM does not rock it at this time.”
I would read the budget presented by the finance minister later today and assimilate the market’s reaction to it, keeping this in mind.
How to read the budget?
The budget should be read and analysed by investors, as they would read and analyse the annual report of a company they are invested in.
If we consider India as a company - annual budget would be the annual account for the current year and forecast for the next year; and budget presentation in the Parliament and subsequent press conference would be the conference call with various stakeholders.
An investor who wants to invest in this company would want to objectively analyze:
(i) The past performance of the company in terms of growth;
(ii) The credibility of the management in terms of professionalism, integrity, execution and delivery on promises;
(iii) The future prospects in terms of growth, competitiveness, financial stability, cost of capital, price stability, etc.; and
(iv) The relative positioning in terms of expected returns, access to markets, regulatory flexibility, costs (taxation etc.).
Past performance
The Indian economy has faced a variety of internal and external challenges in the past 6-7 years that have hindered acceleration of economic growth, despite a number of positive policy stimulants. Demonetization, Covid-19 pandemic and Russia-Ukraine War could be listed as the three major events that contributed to the slowdown in momentum of growth. High inflation due to broken supply chains and the consequent monetary policy tightening were notable collaterals that impacted the growth materially.
Implementation of Bankruptcy Code and RERA, nationwide roll-out of GST, widespread adoption of digital payments, schemes to encourage domestic manufacturing (production Linked Incentive or PLI) with the objective of import substitution and/or export promotion, some major infrastructure development initiatives like National Logistic Policy, multiple greenfield expressways, etc.; initiatives to improve carbon footprint, especially through clean fuel etc. are few of the growth accelerators that have not yielded the desired results as yet due to the growth blocking events.
It is expected that in the next two years the strong headwinds created by these challenges might subside and we may see growth momentum accelerating. In the next 23 months (end of 2024) we may witness delivery of many healthy projects that shall further accelerate the economic growth and development process of India. These projects include the much awaited dedicated Freight Corridors, Mumbai Trans Harbor Link, Delhi-Mumbai Expressway, Ganga Expressway, Navi Mumbai and NOIDA international airports, Mumbai metro etc. Completion and operationalization of these key infrastructure projects shall also catalyze significant follow up industrial and real estate capex in the private sector; while creating scope for another round of large infrastructure building capex in the public/private/joint sector.
The past performance in terms of economic growth has not been remarkable. However, there is a case to not let the past performance overwhelm the sentiment and expectations for the mid-term (next 5-6yrs).
The latest Economic Survey claims that the economy has fully recovered from the impact of the pandemic and war and is poised to grow at an accelerated speed.
Governance capability
The governance quality and execution track record of the incumbent government has not been unblemished in the past few years. There have been instances of superior execution, as in case of vaccination, food security and bio fuel etc., expressway construction; whereas in many other cases execution has lagged – specially in case of disinvestment, GST reforms, education policy, direct tax code, judicial reforms etc.
Future prospect
In FY23, the Indian economy is expected to grow by 7%, primarily driven by private consumption and public capex. With inflation showing definite signs of easing and settling within the RBI’s tolerance range (4-6%), monetary conditions may ease in FY24. The bank and corporate balance sheets have been materially repaired and financial conditions are now stable. Both the consumer and business confidence are improving. With buoyancy in tax collection sustaining and Covid-19 stimulus unwinding, the fiscal conditions may improve, further enhancing the scope for public investments in capacity building.
The changes in the global order that are leading the shift in global supply chains, could also favor the economies like India that have a robust political system, stable financial system and supportive economic infrastructure in place.
Two things that may keep the growth acceleration under check are (a) global economic slowdown impacting the export demand and keeping the current account under pressure; and (b) the cost of funds (interest rates) staying at elevated levels.
The latest economic survey forecasts the real economy to grow at a pace of 6.5% (nominal growth of 11%) in FY24.
Relative positioning
The relative positioning of India in terms of economic growth potential appears very strong at this point in time. However, insofar as the financial markets are concerned, the conditions are not so favourable. The relative valuations are expensive and global investor positioning still overweight as compared to peers like China. We may therefore continue to see selling pressure from global investors for some more time. Nonetheless, for domestic investors the risk reward appears marginally positive in equities and very good in bonds.
Key themes
1. Inflation and rates peaking, liquidity improving
2. Fiscal conditions improving
3. Capex story slowly materializing
4. Current account under stress, but external balance comfortable
5. Financial condition stable
