Union Budget FY2023-24
Pragmatic budget with focus on capex & consumption
Key macroeconomic highlights
- The government retains fiscal discipline with fiscal deficit as a percentage of GDP for FY24 estimated at 5.9% vs 6.4% for FY23. Government to pursue a broad path of fiscal consolidation to attain a fiscal deficit lower than 4.5% of GDP by FY 2025-26. Nominal GDP growth rate for FY24 is projected at 10.5%
- High capital expenditure is driven by higher allocation to road transport and highways, railways, and defence. This signifies government’s thrust on infrastructure development which will also help crowd-in private investment
- Financing of fiscal deficit largely through market borrowing and small saving schemes. Net market borrowing including short-term for FY24 is budgeted at INR 12.31 lac crores vs INR 12.08 lac crores of FY23. The 10-year benchmark bond yield moderated by 12 bps as the market borrowing for FY24 came in lower than the market expectations
- Net tax revenue at INR 23.31 lac crores is expected to grow at a reasonable rate of 12% in FY 2024 resulting in improvement in economic activity, widening of tax base & compliance to support tax revenue growth
- The total expenditure for FY24 estimated at INR 45.03 lac crores is 7.54% higher than the revised estimate for FY23. Capital expenditure estimated at 10 lac crores is 37.4% higher than the FY23 revised estimate
- Share of capital expenditure as a portion of total expenditure has grown to 22.2% in FY24 vs 12.1% for FY21
Other key takeaways of the Union Budget FY2023-24
- Priorities of this budget – Saptarishi
- Inclusive Development – focus on agriculture, health, education & skilling
- Reaching the Last Mile – focus on rural and tribals
- Infrastructure and Investment – capex boost
- Unleashing the Potential – measures related to specialized AI centres, national data governance policy, relief to MSMEs, etc.
- Green Growth – outlays for green hydrogen mission, energy transition, renewable energy evacuation, etc. to incentivize sustainable actions
- Youth Power – measures to generate employment for the youth and boost tourism sector
- Financial Sector – expansion of credit guarantee for MSMEs, new small savings scheme for women, benefits for senior citizens, etc.
- Tax proposals
- Custom duty
- Reduction in duty on import of capital goods for Li-ion battery manufacturing, import of mobile camera lens, seeds for manufacturing lab grown diamonds, copper scrap and denatured ethyl alcohol
- Custom duty on gold articles and import duty on silver increased
- Direct tax
- Income tax limit for rebate of income tax increased from INR 5 lac to INR 7 lac under the new regime
- Surcharge rate on income above INR 5 crore to be reduced from 37% to 25% under new regime
- Income tax structure under the new regime changed to five slabs and increased the tax exemption limit to INR 3 lac
- INR 52,500 standard deduction under new tax regime for an salaried person with an income of INR 15.5 lac or more
- Limit for tax exemption for leave encashment on retirement of non-government salaried employees enhanced from INR 3 lac to INR 25 lac
- Additional measures
- Tax on capital gains can be avoided by investing proceeds of such gains in residential property. This is proposed to be capped at INR 10 crore
- The income from market linked debentures is proposed to be treated as capital gains arising from transfer of short-term capital assets
- Proposed to provide that where aggregate of premium for life insurance policies (other than ULIP) issued on or after April 2023 is above INR 5 lac, income from only those policies with aggregate premium up to INR 5 lac shall be exempt. This will not affect the tax exemption provided to the amount received on the death of person insured. It will also not affect insurance policies issued till 31st March 2023
Market reaction – The focus of this year’s budget is to improve capex and consumption demand to support economic growth. High capital expenditure by the government will help to crown-in private capex. Along with this, few changes on the direct tax from should have a positive impact on the consumption demand. Equity markets gave a muted reaction, barring Sensex most other market cap indices ended in red. Debt market reacted positively as the government G-sec borrowing for FY24 came in lower than the market expectations. The 10-year benchmark G-sec yield closed at 7.27%, down 12 bps
Investment strategy in view of budget announcements
Investors’ need to understand the impact of these announcements on various asset classes which in turn will reflect in the performance of their investments in future. Here we state a few points which should be considered while making investments.
- Indian equity market valuations are currently above long-term average (LTA) and are moving towards slight overvaluation zone. Large-caps continue to trade at a premium relative to mid and small-caps.
- At the current juncture, our broad equity / debt split remains close to neutral levels. This means no significant tactical deviations from the asset allocation suitable for one’s risk profile
- At present, the shorter end of the yield curve (upto 3 to 5-year segment) provides better risk adjusted opportunities. The current credit spreads are below long-term average and may not offer attractive reward for risk
- Multi-asset investment approach would help navigate market volatility. At the current (equity) market valuations, one should consider staggering investments into equities and follow an asset allocation mix based on one’s risk profile and investment horizon
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