There’s limited scope for a positive surprise in India’s upcoming budget on 1 February, Jefferies said.
The need for fiscal consolidation and a busy political calendar will make the Finance Minister Nirmala Sitharaman’s job tough on 1 February, the brokerage said in an investor note. The rollback of extra food rations scheme creates space of about $15 billion, which could be utilized for other social programs/deficit reduction, it added.
However, the need to generate additional resources may create the risk of increased capital gains taxes, Jefferies said. “Overall, we see limited scope for the budget to surprise positively,” it noted.
The brokerage’s key expectations are:
Fiscal Consolidation
Inflation at the top-end of the Reserve Bank of India’s comfort range and a medium-term (FY26) target of bringing the fiscal deficit down to 4.5% of gross domestic product (GDP) limits the maneuvering space for the government in the FY24 budget.
The government is ending the extra food ration scheme, which should save about 40 basis points (US$15 billion from FY24 spending.
The FY24 fiscal deficit is likely to be at 5.9% of GDP (down 0.5 percentage points year-on-year), up 2% YoY in absolute terms to 17.9 trillion rupees. Government securities (G-Sec) yields likely price in this consolidation and could stabilize in the range of 7%-7.25% over FY24, as inflation moderates.
Capital Expenditure Growth
Considering the likely fiscal consolidation, the government’s expenditure growth may be pegged at around 8%.
FY23E’s over 30% surge in capex by the government has taken the capex as percent of GDP to a multi-decade high of 2.9%. The government is likely to largely retain this ratio in FY24, implying capex growth of around 12%.
Any spending headroom will likely be diverted to social causes, in-line with past trends, as 2024 national elections near.
Material jump in production linked incentive (PLI) scheme allocations from $1 billion level in FY23E would support private capex.
Tax Implications
For FY24, the estimated 15% corporate earnings growth and 11% nominal GDP growth, should drive a 12.5% direct tax growth.
Indirect tax would likely grow slower (+7%), as scope to hike custom and excise duties is limited, considering inflationary concerns.
Specific details to watch out for include:
Extension of corporate tax rebates for green manufacturing/other incentives for renewable energy and electric vehicles.
Capex/Infrastructure may see 15% rise in budget spending on road and rail.
Insurance amendment bill may address composite licenses.
Tobacco taxation
Privatization candidates - IDBI Bank, Container Corporation of India Ltd., Shipping Corporation of India and BEML Ltd.
Potential hike in equities capital gains tax and increase in the definition of the long-term.
Significant (over 20%) boost to rural infrastructure schemes.