No adverse policy changes in the interim budget was a boon: Rahul Arora

The overarching theme of the budget focused on uplifting the poor, women, youth and farmers. However, there were limited policy changes. Nevertheless, the fact that there were no adverse policy changes was itself a boon for equity markets.

The interim budget had fiscal consolidation at its heart with the government surpassing the fiscal deficit target for FY24 at 5.8 per cent of GDP against the budgeted 5.9 per cent, while pegging the target for FY25 at 5.1 per cent below the most optimistic market projections. 

However, we note the fiscal consolidation in FY24 has come at the expense of lower capital expenditure, which was trimmed by 5 per cent from the original estimates.

 

The focus on fiscal consolidation led by moderation in government capex aims to reduce the risk of the government crowding out the private sector.

Fiscal consolidation also brings it with the advantage of reducing long term interest rates in the country, thereby facilitating investments.

Nevertheless, in the short term we expect only moderate impact on yields given that the net market borrowing pegged at Rs 11.75 trillion was largely in line with expectations.

Elevated global yields and tight liquidity will likely keep bond yields range-bound.

However, going forward, a turn in the rate cycle, moderation in liquidity pressures and G-Sec demand from FPIs with inclusion in global bond indices will support the G-sec market with yields likely to moderate to 7 per cent or below in FY25.

Lower interest rates will also support valuations and equities as an asset class.            

While the budgetary allocation for railways has not seen any material increase and is up by only around 5 per cent in FY25, schemes for coach upgradation should benefit companies catering to the sector.

The three- new railway corridors should help reduce logistics costs for companies by improving the rail: road mix. 

The highest increase in capex allocation (up 50 per cent) was in terms of interest free loans to states.

In terms of focus on the rural sector, the allocation towards rural development is up by 11.2 per cent in FY25.

Allocations under the Mahatma Gandhi National rural Employment Guarantee Scheme has been increased to Rs 860 billion in the revised estimates for FY24 and maintained at the same level for FY25.

Sustainable development and the transition to Net Zero also remained in focus with a move towards mandated blending of compressed bio-gas for CNG and PNG.

Other schemes include announcement of Viability Gap funding for offshore wind energy projects and coal gasification and liquefaction.    

Affordable housing received notable mention with a 50 per cent increase in allocation under PM Awas Yojana in FY25, yet this came on the back of a significant cut in allocation in FY24. 

The government will soon launch a housing for middle class scheme, which could benefit affordable housing focused NBFCs.  

The broad focus on improving the quality of expenditure towards capex remained albeit with some deterioration as capex growth is slowing.

Overall, we see the budget as largely credible in terms of its assumption on tax revenue growth estimated at 11.9 per cent with nominal GDP growth pegged at 10.5 per cent.

The budget lays the foundation in transitioning India towards a developed economy by 2047, which also bodes well for equity markets. 

Disclaimer: Rahul Arora is CEO-Institutional Equities at Nirmal Bang. Views expressed are his own.