UNION BUDGET - 2023 Key highlights and implications for the Economy

 UNION BUDGET - 2023-24 - Healthy Growth Capex…but with Fiscal Discipline

BUDGET 2023

                                                             The Budget clearly ticks all boxes with strong 33% higher Capex outlay, pushing consumption rather than using savings, sticking to the fiscal consolidation path with the strong fiscal discipline. Fiscal deficit target being brought down below 6% (to 5.9%) is key positive. This is final full Budget of current government, it has chosen a bolder path, highlighting its resolve to give impetus to growth by focusing on infrastructure and capex. Higher growth with fiscal discipline indicates improving financial strength of India. This also increases investors’ confidence on India story despite tough global business environment. One of the highest GDP growths of ~7% indicates India’s relative strength and lays solid foundation to become top 3 economies globally over coming years. In our view, the government has hit the right spot amid fiscal constraints by focusing on infrastructure development, which should essentially aid several ancillary industries.  

Budget gives a big leg-up to capital investment and also attends to MSMEs as they are the engine of growth. In case of sustained capital investment, it also gives a push to the private capex going ahead. Giving tax reliefs to individuals and middle class under new regime would cushion consumption on the back of higher savings. The budget has a key focus on rural economy and Agri sector, which is the need of the hour amid ongoing slowdown in rural economy. Increased outlay of Rs20tn for agriculture credit and few similar Agri focused schemes would revive rural economy. A sub-scheme under PM Matsya Sampada Yojana would benefit people living in coastal areas. According to us, four emphasis points of this budget are Inclusive development, Reaching the last mile, Unleashing potential and green growth.

Government has proposed to increase the total investment by eight state-owned power companies by ~15% to Rs60.8bn for FY24 from revised estimate of Rs52.9bn in FY23. Government is expecting 17% higher dividend at Rs480bn from RBI, PSBs and financial institutions in FY24 to support balance sheet. The nominal GDP growth for FY23E is estimated at 15.4% while for FY24E it is expected to be lower at 10.5% due to fall in inflation. Real GDP growth is projected at 7% and expected to come down to 6-6.5% in FY24E. India is looking to become a global hub for ‘Shree Anna’, the Indian Institute of Millet Research to be supported as the Centre of Excellence at the international level.

Thrust on Infrastructure continued  

The capital investment outlay is being increased steeply for the third year in a row by 33% to Rs10tn, 3.3% of GDP and jumped to almost 3x of FY20 outlay. This substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowd in private investments, and provide a cushion against global headwinds. The Effective Capital Expenditure of the Centre is budgeted at Rs13.7tn, which will be 4.5% of GDP. The direct capital investment by the Centre is complemented by the provision made for creation of capital assets through Grants-in-Aid to States. The big positive surprise was huge 66% jump in Railway capital outlay of Rs2.4tn, up 9x since FY14. The government is also looking to add 100 critical transport infrastructure projects, for last and first mile connectivity for ports, coal, steel, fertilizer, and food grains. They will be taken up on priority with investment of Rs750bn, including Rs150bn from private sources. The outlay for PM Awas Yojana increased by 66% to Rs790bn. Focus is also on adding 50 additional airports, heliports, water aerodromes and advance landing grounds for improving regional air connectivity. States and cities will be encouraged to undertake urban planning reforms and actions to transform our cities into ‘sustainable cities of tomorrow’. This means efficient use of land resources, adequate resources for urban infrastructure, transit-oriented development, enhanced availability and affordability of urban land, and opportunities for all.

Fiscal Deficit Well Under Control despite Higher Capex 

The fiscal deficit target of 5.9% for FY24 looks reasonable. The Centre is looking to borrow a record Rs15.43tn from the markets in FY24 to finance its fiscal deficit of 5.9%. The borrowing for FY23 is set to be lower at Rs14.21tn. The government has slashed the divestment target from Rs650bn to Rs500bn for FY23E and targets Rs510bn for FY24E. So far, the government has raised a mere Rs310bn in FY23 by selling its stake in public sector enterprises and is set to miss the annual target as no major disinvestment is likely to fructify before Mar’23. A major chunk of divestment came from the landmark LIC IPO which raised Rs210bn in May’22. However, in the light of just 6% growth assumption in revenue receipts to Rs263tn in FY24E, the fiscal deficit target looks to be understated and can potentially surprise positively.

Sunrise Sectors are Key Focus Areas 

While the government has focused on capex and investments, sunrise sectors with due importance to support climate change received the maximum allocation. Infrastructure, renewable energy, alternate fuels, curb fossil fuel, electric mobility and digital platform have received the maximum attention. The government of India has committed to get 4,000 MWH of battery storage projects built in its national budget and to come up with support mechanisms for pumped hydro. It also focused on Green Growth as one of its seven main priorities, along with things like reform and support of the finance sector, inclusive development and ramping up investments in infrastructure and productive capacity. Under the Green Growth priority agenda, Rs350bn will be provided for the Ministry of Petroleum and Natural Gas capital investments into energy transition and net zero agenda projects. The budget commitment to its National Green Hydrogen Mission, which follows a similar success as that of solar PVs. Rs197bn will be invested in the hydrogen mission, with India targeting annual production of 5mn tonnes of green hydrogen by 2030. This will facilitate transition of the economy to low carbon intensity, reduce dependence on fossil fuel imports, and make the country assume technology and market leadership in this sunrise sector. There will be a significant financial support for interstate transmission projects to transmit 13GW of renewable energy from Ladakh, which indicates clear focus on renewable energy as well as development of Hilly regions. India is moving forward firmly for the ‘panchamrit’ and net-zero carbon emission by 2070 to usher in green industrial and economic transition. This Budget provides Rs350bn for priority capital investments towards energy transition and net zero objectives, and energy security by Ministry of Petroleum & Natural Gas.

New Normal Personal Income Tax  

On personal tax front, in new tax regime, new tax slabs are introduced with zero tax for the income up to first Rs7,00,000, while 2 new tax slabs introduced. It has few key announcements for working middle class with ~20-25% reduction in income tax outgo. An individual with an annual income of Rs900,000 will be required to pay only Rs45,000 vs. earlier Rs60,000. Standard deduction in the new tax regime is increased to Rs52,500 from Rs50,000, while highest tax rate brought down from 42.74% to 39% now. The limit of Rs300,000 for tax exemption on leave encashment on retirement of non-government employees increased to Rs25,00,000. As a result of these tax proposals, revenue of ~Rs380bn in direct taxes and ~Rs10bn in indirect taxes – will be forgone while revenue of about Rs30bn will be additionally mobilized. However, limiting capital gain benefit on sale of house asset up to Rs100mn is key negative for HNIs and would act as structural damage for high value real estate projects.

Ease of Doing Business

For enhancing ease of doing business, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized. For furthering the trust-based governance, the government introduced the Jan Vishwas Bill to amend 42 Central Acts. The budget proposes a series of measures to unleash the potential of our economy.

Way Forward 

While the Union Budget seems more realistic and more promising on growth impetus, a renewed focus on reviving infrastructure development should lead to a sharp uptick in ordering activities in the coming months. Further, a continued thrust on reviving the rural economy, higher capital spending, tourism focus, number of reforms in financial sector with new age technologies and climate change should continue to support sectors like Financial Services, Capital Goods, Automobile, Agri equipment, Green Energy sector, EV space, Travel & tourism and Hospitality.

Sectoral Impact 

Agriculture

Budget Proposal

Agri credit target increased to Rs20tn with emphasis on animal husbandry, dairy and fisheries. Impact → Positive

Reduction of custom duty on inputs for fish feed. New sub scheme of PM Matsya Sampada Yojana with targeted investment of Rs60bn to further enable activities of fishermen, fish vendors and micro & small enterprises.  Impact → Positive

Allocation for Jal Jeevan Mission increased by 27% to Rs7bn. Impact → Positive

Outlay of Rs22bn for Horticulture Clean Plant Program: Boost availability of disease-free, quality planting material for high value horticultural crops Impact → Positive

Establishment of decentralized storage capacity: Help farmers store their produce and realize remunerative prices through sale at appropriate times. Impact → Positive

Automobile

Budget Proposal

Capital expenditure increased by sharp 33% to Rs10tn. Impact → Positive

Agriculture credit target increased to Rs20tn. Impact → Positive

Outlay for PM Awas Yojna increased by 66% YoY to Rs790bn Impact → Positive

Outlay for National Green Hydrogen Mission of Rs197bn to boost alternate fuels and curb fossil fuels. Impact → Positive

Scrappage of old government vehicles, and shift towards cleaner vehicles Impact → Positive

Customs duty exemption being extended for capital goods used for manufacturing lithium batteries. The government will support setting up of battery storage capacity of 4,000 MWH in India with viability gap funding. Impact → Positive

The basic customs duty (BCD) on vehicle (including EVs) in Semi-Knocked Down (SKD) form is being increased from 30% to 35% Impact → Positive

The basic custom duty (BCD) on vehicles in Completely Built Unit (CBU) form is being increased from 60% to 70% Impact → Positive

FAME allocation increased to Rs51.7bn in FY24 vs. Rs29bn in FY23. PLI allocation for Automobiles and Components also increased to Rs6bn in FY24 vs Rs0.1bn in FY23. Impact → Positive

Aviation

Budget Proposal

50 additional airports, heliports, water aerodromes and advance landing grounds will be revived for improving regional air connectivity. Impact → Positive

Capital Goods

Budget Proposal

Capital investment outlay of Rs10tn. Impact → Positive

Capital outlay of Rs2.4tn for Railways Impact → Positive

Identification of 100 Infrastructure projects: The government has identified 100 Infrastructure projects for end-to-end connectivity for Ports, Coal, Steel and Fertilizer Sector. The projects to be taken up on priority with investment of Rs750bn, including Rs150bn from private sources. Impact → Positive

Additional Airports: 50 additional Airport for better Regional Connectivity Impact → Positive

Urban Infrastructure Development Fund of Rs100bn per annum through use of priority sector lending shortfall. This will be managed by the National Housing Bank. It will be used by public agencies to create urban infrastructure in Tier 2 and Tier 3 cities. Impact → Positive

Outlay for PM AWAS Yojana increased by 66% to Rs790bn. Impact → Positive

Cement & Building Materials

Budget Proposal

Capital investment outlay increased by 33% to Rs10tn, 3.3% of the GDP Impact → Positive

The government has identified 100 Infrastructure projects for end-to-end connectivity for Ports, Coal, Steel and Fertilizer Sector Impact → Positive

Outlay for PM AWAS Yojana increased by 66% to Rs790bn. Impact → Positive

Chemicals

Budget Proposal

Basic Customs Duty on acid grade Fluorspar reduced to 2.5% from 5% Impact → Positive

Basic Custom Duty on Styrene and Vinyl Chloride Monomer increased from 2% to 2.5% Impact → Positive

Basic Custom Duty on import of Crude Glycerin used for the manufacture of Epichlorohydrin reduced from 7.5% to 2.5% Impact → Positive

PM-PRANAM scheme will be launched to incentivize States to promote alternative fertilizers and balanced use of chemical fertilizers. Centre will also encourage 10mn farmers to adopt organic farming over the next 3 years. 10,000 Bio-Input Resource Centers will be set-up, creating a national-level distributed micro-fertilizer and pesticide manufacturing network. Impact → Positive

Defence

Budget Proposal

Higher capex for defence: Rs1.62tn has been set aside for capex including new weapons, aircraft, warships and other military hardware. Impact → Positive

The capital outlay for the Ministry of Defence has pegged at Rs87.7bn, while Rs138.4bn has been set aside under capital outlay. Impact → Positive

Defence budget increased to Rs5.94tn for FY24 from Rs5.25tn in FY23. Impact → Positive

Financial Services

Budget Proposal

Credit Guarantee Scheme for MSMEs will be increased by Rs90 bn which would provide additional collateral free credit of Rs2tn to MSMEs. New scheme to also cut interest rate on MSME loans by 1% Impact → Positive

Setting up National Financial Information Registry and Entity Digi Locker Impact → Positive

The income tax exemption on aggregate proceeds of insurance policies above Rs5 lakh (other than ULIPs) to be dropped for policies purchased from 1st April 2023 onwards. Impact → Positive

Certain amendments to be made to the Banking Regulation Act, Banking Companies Act and RBI Act. Simplify KYC process for various financial institution through common digital platform. Impact → Positive

Conversion of gold into electronic gold receipts and vice versa will not be taxed as capital gains. Impact → Positive

FMCG

Budget Proposal

National Calamity Contingent Duty (NCCD) on specified cigarettes revised up by 16% Impact → Positive

Multiple budget announcements for the agriculture and allied sectors to boost rural consumption. Impact → Positive

Green Energy

Budget Proposal

Allocation of Rs207bn for renewable energy evacuation: Inter-State transmission system for evacuation and grid integration of 13 GW renewable energy from Ladakh Impact → Positive

Rs350bn priority capital towards energy transition, achieving net zero objectives and energy security. Impact → Positive

Energy Storage Projects: Battery Energy Storage Systems with capacity of 4,000 MWH to be supported with viability gap funding. Impact → Positive

GOBARdhan scheme: 500 new ‘waste to wealth’ plants including 200 compressed biogas (CBG) plants (75 plants in urban areas) and 300 community or cluster-based plants at total investment of Rs100bn. Impact → Positive

5% CBG blending mandatory for companies marketing natural gas. Impact → Positive

Coastal shipping to be promoted via PPP mode with viability gap funding. Impact → Positive

Health & Education

Budget Proposal

Establishment of Nursing Colleges: 157 new nursing colleges will be established in co-location with the existing 157 medical colleges established since 2014. Impact → Positive

Budget outlay for Eklavya Model Residential Schools increased from Rs20bn to Rs59bn. In the next three years, center will recruit 38,800 teachers and support staff for the 740 Eklavya Model Residential Schools, serving 3.5 lakh tribal students. Impact → Positive

National Digital Library for children and adolescents will be set-up for facilitating availability of quality books across geographies, languages, genres and levels, and device agnostic accessibility. Impact → Positive

IT & Internet and Digital service

Budget Proposal

An Entity Digi Locker will be set up for use by MSMEs, large business and charitable trusts. This will be towards storing and sharing documents online securely, whenever needed, with various authorities, regulators, banks and other business entities. Impact → Positive

A National Digital Library for children and adolescents will be set-up for facilitating availability of quality books across geographies, languages, genres and levels, and device agnostic accessibility. Impact → Positive

Gems and Jewellery

Budget Proposal

Lab Grown Diamonds: Provide R&D grant to one of the IITs for five years to encourage indigenous production of LGD seeds and machines. Impact → Positive

Reduce basic customs duty on LGD seeds from 5% to NIL. Impact → Positive

Basic customs duty on articles made from precious metals such as gold, silver and platinum increased from 20% to 25% Impact → Positive

METALS

Budget Proposal

Exemption from Basic Customs Duty (BCD) on raw materials for manufacture of CRGO Steel, ferrous scrap and nickel cathode is being continued Impact → Positive

The concessional BCD of 2.5% on copper scrap is also being continued Impact → Positive

Outlay for PM AWAS Yojana increased by 66% to Rs790bn. Impact → Positive

Mid Cap

Budget Proposal

100 labs for developing applications for 5G services will be set up in engineering institutions to realize a new range. Impact → Positive

Higher Capex: Capital investment outlay increased by 33% to Rs10tn, Identification of 100 Infrastructure projects and 50 additional Airport for better Regional Connectivity Impact → Positive. 

OIL & GAS 

Budget Proposal

GOBARdhan scheme: 500 new ‘waste to wealth’ plants including 200 compressed biogas (CBG) plants (75 plants in urban areas) and 300 community or cluster-based plants at total investment of Rs100bn. Impact → Positive

5% CBG blending mandatory for companies marketing natural gas Impact → Positive

PVC PIPES 

Budget Proposal

Cash Transfer of Rs2.2tn to over 114mn farmers Impact → Positive

The allocation for Jal Jeevan Mission has increased from Rs600bn to Rs700bn  Impact → Positive

The allocation for PM Krishi Sichai Yojana has increased from Rs80bn to Rs107bn in FY24 Impact → Positive

Increase in BCD on imports of VCM from 2% to 2.5% Impact → Positive

SUGAR 

Budget Proposal

Reduction of basic custom duty on Denatured ethanol (used in chemical industry) from 5% to NIL. Impact → Positive

TELECOM

Budget Proposal

100 labs for developing 5G use cases and applications to be set up in engineering institutions. Impact → Positive

Rs22bn for Optical Fiber Cable based network for Defence Services Rs7bn for telecom projects in the Northeastern states. Impact → Positive

Extension of NIL custom duty on certain inputs for optic fiber and optic fiber cables for 2 more years Impact → Positive

TOURISM

Budget Proposal

At least 50 tourist destinations will be selected through challenge mode to be developed as a complete package for domestic and international tourism. Impact → Positive

Integrated Development of Tourist Circuits around specific themes (Swadesh Darshan): Outlay increased by 135%. Impact → Positive

States will be encouraged to set up a ‘Unity Mall’ for the sale of their products in respective State capital/ major tourist town. Impact → Positive