FM deftly balances social equity with investment growth

For this budget proposal, there was an apprehension that the development agenda would be traded for social redistribution. However, the FM has sent a strong signal of consistency and discipline to the investing community. In an era of economic uncertainty, a bearish outlook and continued geopolitical turmoil, the Government of India has determined to continue on its steady path. Focus on building self-reliant India, increasing domestic manufacturing capacity, promoting exports and attracting foreign capital.

First, macroeconomic stability continues.

The focus on prudent fiscal management is the most confidence-inspiring aspect of the budget proposal. Adherence to 6.4% fiscal deficit target in FY23 and 50bps reduction in FY24 sets a credible target of 4.5% in FY26. This should have a beneficial effect on the wider economy as it suggests that money will be available for private entrepreneurs. While last year’s budget took steps to enhance India’s digital and technology initiatives, this year the government has taken a step forward to encourage more investment and employment in the space. The reported 90%+ growth in digital payments also means better tax compliance. At the same time, a stable fiscal regime should support currency stability. These factors favor greater formalization of the economy.

Second, growth driven by capital expenditure

The main feature of this year’s budget is continuity in policy formulation. The government has increased capital expenditure for the third time in a row. This continues with a 33% increase in capex outlay to INR 10 trillion or about 3.3% of GDP. This will likely enable a stronger infra-based economy in the long term.

The budget will also be remembered for its focus on Tier II/III cities of India, which have received 50 new airports, which will enable a growth multiplier effect. Also, the move to extend interest-free loans to states for one more year is a strong signal of consistency and discipline with an eye on long-term gains rather than short-term SOPs. It will be financed by a Rs 100 billion Urban Infra Fund using the priority sector debt shortfall.

Third, recognition of entrepreneurship as a growth driver.

The budget appreciates and recognizes that the startup ecosystem is a significant high-value job creator in the country. The big announcement to extend the date of income tax benefits to start-ups has brought relief to the sector. The budget announcement also reflects some fresh thinking in initiatives such as the Agriculture Accelerator Fund, public debt infrastructure for credit, and the National Data Governance Policy. As India moves forward to become the third largest start-up eco-system in Ease of Doing Business rankings, there are more steps that need attention. This is featured in low compliance (around 39,000!), enhanced credit guarantee, Nimbler KYC using only PAN, and faster dispute resolution. Finally, in rationalizing duties for handset components, there is something for India’s nascent manufacturing

Fourth, a voice for the middle class

As a contributor to Indian growth, there is finally a recognition that policy needs to focus not just on the base of the pyramid but also the middle class. At one end of the spectrum, the 66% increase in PMAY for the emerging middle class provides a boost to the affordable housing sector. On the other hand, the reduction in top-level marginal tax in line with global benchmarks shows the maturity of India’s taxation. Through such changes we believe that domestic consumption which forms about two-thirds of India’s GDP should see the long-awaited demand recovery.

Fifth, action on stability

Climate change and sustainability have become a focal point for businesses and governments alike. In the year of our G20 leadership, the government’s announcement of a green hydrogen mission, 4,000 MWh of battery energy storage is applauded. And this agenda is not just top-down, but deeply intertwined with the announcement to support 10 million farmers for natural farming.

With this budget, India should be on track for an estimated GDP range of 6.9%, and will likely be at the forefront of economic growth and innovation. FY23’s 7% distributed economic growth only creates more optimism for FY24 as each of these initiatives translate into greater economic stability. During the last year, we saw inflation, rising rates and currency volatility. In a stable, mature policy formulation that avoids sudden changes, this budget clearly consolidates India’s positive economic momentum.

Gaurav Sharma, India Private Equity Head, Investcorp and Anshuman Goenka, Partner, India Private Equity, Investcorp

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