The recent budget has introduced significant changes, particularly in how the government plans to utilise the RBI’s dividend payout. Contrary to expectations, the government opted to use almost the entire payout to reduce the fiscal deficit to 4.9%. This decision is commendable, especially considering it was the first budget under a coalition government. The finance minister has reallocated expenditure while maintaining capital expenditure at Rs. 11.11 lakh crore and increasing allocations to the rural sector. Additionally, a new policy for education and skilling, Employment Linked Incentives (ELI), has been introduced, marking a shift from the previous Production Linked Incentives (PLI).

Key Economic Insights

The Economic Survey highlighted two crucial data points:

  1. India needs to create approximately 8 million jobs per year until at least 2036.
  2. Factories with 100+ workers have seen a 13% workforce growth, indicating that India's manufacturing sector is becoming more organised.

The introduction of ELI aims to boost job creation in the formal sector, which should positively impact the economy over the next few years.

Government Spending and Its Implications

Government spending was lower in the first quarter of the fiscal year due to the general elections. With another budget scheduled for February 2025, yearly expenditure will need to be completed in a shorter timeframe. This could lead to two possible outcomes:

  1. The government meets its expenditure targets, providing strong support to multiple sectors.
  2. The government spends less, beating the fiscal deficit target, which could lead to lower inflation and possibly lower interest rates by the RBI.

Sectors in Focus

Infrastructure/Capital Goods & Railways: Allocation for new infrastructure projects in Bihar and Andhra Pradesh (for Amravati) should benefit EPC players in those regions. The announcement of new power plants is also a positive sign. The railway sector saw an allocation of Rs. 2.7 lakh crore, similar to the previous year. However, increased procurement targets for wagons and electrical locomotives suggest higher actual expenditure. The dedicated freight corridor is expected to boost demand for rolling stock, benefiting capital goods manufacturers.

Highways and Roads: While the allocation for highways remains unchanged, there is a 6% increase in funding for other roads compared to the previous year.

Agriculture: There are no major changes compared to the interim budget. The fertiliser subsidy remains unchanged. The release of 109 high-yielding crops should gradually impact farm income positively. Reduction in Basic Customs Duty (BCD) for aquaculture inputs will help the sector regain some lost ground in export markets.

Real Estate & Building Materials: The removal of indexation benefits for Long Term Capital Gains (LTCG) calculation might slow down the investment property segment. However, improvements in the regulatory landscape for REITs and InvITs have made these asset classes more attractive, potentially enhancing returns for investors. Affordable urban housing saw a 36% increase in allocation, which should benefit developers and building material companies.

Business Services: Staffing, skilling, and recruitment services companies could see strong growth due to ELI. However, the actual impact of this policy remains uncertain. The government's expenditure announcement of Rs. 2 lakh crore over the next five years is significant.

Capital Markets: The increase in Capital Gains (CG) tax rates and Securities Transaction Tax (STT) is slightly negative for trading volumes but was necessary to discourage high-frequency speculative trades. SEBI's recent proposal to introduce a new asset class with F&O products will benefit the sector in the medium term.

Consumer Sector: The emphasis on job creation and increased allocation towards rural areas is positive for consumption-related sectors. New investments in these sectors will likely be gradual due to existing high costs. The import duty cut on precious metals should help retailers, with higher volume sales offsetting inventory losses from lower pricing. An annual tax saving of Rs. 17,500 per year will also positively impact general consumption.

Pharma & IT: These sectors could perform well due to external factors such as the recent Rupee depreciation following China's rate cut, although they are not directly related to the budget announcement.

Conclusion

The recent budget has set the stage for significant growth across various sectors. Retail investors should keep an eye on infrastructure, railways, real estate, business services, and consumer sectors. While some changes may take time to manifest, the overall economic outlook appears positive. Investing in these sectors could offer substantial returns as the government’s policies start to take effect.