By Mohit Khanna, Fund Manager at Purnartha One Strategy

In general, the market's expectation was that the government will use the RBI’s dividend payout for welfare activities. However, the Government chose to use almost the entire payout to reduce the fiscal deficit to 4.9 percent or by 70bps YoY. This is commendable, especially when this was the first Budget under a coalition government. The FM re-distributed the expenditure basket while maintaining the capital expenditure at Rs 11.11 lakh crore (as announced in the interim budget) and increasing the allocation to the rural sector. Further, the FM introduced a new policy for education and skilling – Employment Linked Incentives (ELI). So, we can see that the Government’s focus has shifted from PLI (production linked incentive) to ELI.

Let me share 2 data points that was highlighted in the Economic Survey –
1) India needs to create ~80 lakh jobs per year till 2036 at least
2) Factories with 100+ workers have seen 13 percent workforce growth – implying that India's manufacturing is getting more organized.

By introducing ELI, the government is looking to accelerate job creation in the formal sector. This should have a gradual but a strong positive impact on the economy over the next few years.

Another aspect is that the Government’s spending was lower in the first quarter of the fiscal due to the general elections – plus we have another Budget in February 2025 i.e. only 6 months from now. This means that the yearly expenditure should now be done in less time. There can be two possible outcomes –
1) Government meets its expenditure targets – proving a strong tailwind to multiple sectors
2) Government spends less – beating fiscal deficit target – leading to lower inflation and possible lower interest rates by RBI under its Monetary Policy.

Sectors in Focus

Infra/Capital Goods & Railways

Allocation for new infra projects in Bihar, Andhra Pradesh (for Amravati) should help the EPC players focused in those regions. New power plant announcement is also positive. On the Railway side, the allocation of Rs 2.7 lakh crore remained flat as compared to FY24 RE. However, as the government has increased the procurement quantity target (Wagons by 46 percent, Electrical locomotives by 25 percent), my sense is that actual expenditure could increase in the sector. Additionally, a dedicated freight corridor would also lead to higher demand for rolling stock. This could be incrementally positive for players manufacturing the capital goods for the sector.

Allocation to highways remains the same as in the interim budget while allocation to other roads has been increased 6 percent (as compared to FY24 RE).

Agriculture

No major change as compared to the interim budget/ongoing trend. Fertilizer subsidy for both NBS and Urea remains unchanged from the interim budget. Release of 109 high-yielding crops should have a positive impact on farm income – but the impact should only be gradual and difficult to measure at this point in time. Reduction in BCD (basic customs duty) for aquaculture inputs is positive and will help the sector re-gain a bit of the lost ground in the export markets.

Real Estate & Building Material

The government has removed indexation benefits for LTCG (Long Term Capital Gains) calculation. I do not see any major impact from the end-user perspective in the middle-income group category. However, there could be some slow-down in the investment property segment as the holding period of such assets should decrease overtime. On the contrary, the regulatory landscape for REITs and InvITs has significantly improved, creating a more level playing field for investors. By reducing the long-term holding period from three to one year, these asset classes have become more attractive. This positive change is expected to stimulate increased allocation of REITs and InvITs within investor portfolios, diversifying their holdings and potentially enhancing returns.

Affordable Urban housing saw ~36 percent increase in allocation (as compared to FY24 revised estimates) with PMAY (U) securing an allocation of Rs 30,170 crore. This should not only help developers focusing on the segment but also the building material companies like Cement, Tiles, Pipes, etc.

Business Services

Staffing, Skilling and recruitment services companies could see a start of strong tailwinds with ELI (Employment Linked Incentives). However, due to the lack of much empirical evidence, it is difficult to estimate the actual impact of such a policy. Nevertheless, the Government's expenditure announcement totaling Rs 2 lakh crore over the next 5 years is too good to be ignored.

Capital Markets

Increase in CG (capital gains) tax rates and STT (Securities Transaction Tax) is marginally negative for the trading volumes but it was a much-needed bitter-pill to discourage high-frequency speculative trades in the F&O segment by unskilled retail investors. Interestingly, SEBI’s recent proposal to allow a new asset class with F&O products will help the sector over the medium-term.

Consumer

The finance minister has laid a lot of emphasis on job creation and has also increased allocation towards rural. While this is positive for consumption related sectors, the new investment in these sectors should only be gradual as it is already expensive.

Import duty cut on precious metals should ultimately help retailers. Inventory losses due to lower pricing should be well mitigated by higher volume sales (demand).

Annual tax saving of Rs 17,500 per year should be marginally positive for consumption in general.

Additionally, Pharma & IT could be the dark horses but not really related to budget announcement but other external factors like the recent Rupee depreciation following China's rate cut.

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