What the Budget meant for Nifty and Sensex

3 Feb 2023 , 12:14 PM

The Nifty and the Sensex have been under a lot of pressure since the Union Budget. However, the fall and the FPI selling cannot be entirely blamed on the Budget. There were several things that coincided. Firstly, the Adani group stocks have been a short seller’s paradise for the last few weeks, with most of the Adani stocks losing as much as 55-60% from their December peaks. In addition, the 25 bps rate hike by the US Fed and the 50 bps rate hike by the Bank of England have also dampened sentiments. What does all this say about the budget? Incidentally, the Union Budget (on paper) has been rather positive for the capital markets, although that cannot be judged by short term sentiments.

Enhance surplus with tax payers

India is a consumer driven economy and it is hardly surprising that the budget had focused on the Indian tax payer. In fact, the budget addressed the entry level tax payer and the higher income groups separately. Let us first focus on the entry level tax payers. In order to make the New Tax Regime more attractive, the budget has made it the default tax regime for tax payers. Now, under the new tax regime, the base exemption limit has been raised from Rs2.50 lakhs to Rs3.00 lakhs. When the higher rebate impact is added, then the tax free income goes up from Rs5 lakhs to Rs7 lakhs. In addition, the new tax regime has also extended standard deduction benefits of Rs50,000 to salaried and to pensioners.

The other segment that the budget focused is on the higher income groups. Here the surcharge has been cut from 37% to 25%. As a result the effective peak rate of tax for the higher income groups earning above Rs2 crore per year comes down from 42.74% to 39%. That is still above the comparable EM peak rate, but it is now moving in the right direction. Considering these are higher income tax payers, this likely to release funds for higher end consumption and also for additional investment in risk assets.

Macro celebration on the cards

For the stock markets, there is a lot to celebrate on the macroeconomic front. Let us begin with the all-important fiscal deficit. After confirming that the government would be meeting its FY23 fiscal deficit target of 6.4% of GDP, it has cut the fiscal deficit target for FY24 by 50 bps to 5.9%. This is likely to be a positive takeaway for the FPIs and the rating agencies. The other bigger announcement pertains to the growth triggers, especially on capex front.

The Union Budget 2023-24 has given a big boost to capital spending. The capex budget for FY24 has been hiked by 33% to Rs10 trillion or around 3.3% of GDP. In addition, the effective capex in the FY24 fiscal year is likely to be in the vicinity of Rs13.7 trillion or about 4.5% of GDP. That is likely to have a catalytic impact on infrastructure and the capital investment cycle. Above all, the budget has committed Rs2.40 trillion towards capex for the Indian railways including the all-important railway freight corridors across India. Not to be left behind, the credit to agriculture has been hiked to Rs20 trillion for FY24, up from Rs18.5 trillion in FY23. Apart from allocations, there is also a lot of focus on the ecosystem of growth as identified by the Saptarishi 7 pillar approach.

Nothing negative about this budget?

One of the big advantages of the budget is that there was nothing negative about the budget. Here are some things that the budget consciously avoided. 

• It did not bring about any changes to the capital gains tax. That may have disappointed investors expecting some relief, but that is positive in the interest of continuity.

   

• The buyback tax was not touched but that is because any change in the buyback tax would have to be supported by changes to the dividend tax also. Status quo was a good idea in this context.

   

• Above all, the budget made it a point not to tinker with the customs duties except where it entailed reduction of input costs.