Despite hitting fresh record highs earlier in January, Indian stock markets are witnessing a correction ahead of the Interim Union Budget 2024. The announcement made during the Union Budget directly impacts the stock market, as the government policies and financial plans share future trends in various sectors.
The stock market is likely to remain volatile ahead of the Union Budget that will be announced on 1 February 2024. In the last five sessions, the BSE Sensex has fallen over 2 per cent close to the 71,400 mark. The NSE Nifty 50 slipped 489 points or 2.2 per cent to 21,571.80 points.
Since this would be the last budget before the Lok Sabha Elections in May, this would largely be a non-event, and the budget post-elections would be of more significance, which would lay emphasis on the government’s long-term vision, said analysts.
Deepak Jasani, Head of Retail Research at HDFC Securities said there would be some buildup of expectations ahead of the vote on account but major policy reforms may get postponed to the regular budget in June/July 2024.
“This has also been hinted at by the finance minister in December 2023. The vote on the account could be shorn of any mega announcements or large benefits to people. The government is likely to stay on the fiscal course-correction glide path in the Interim Budget for FY25, shunning populist spending or incentives ahead of the summer general election,” he said.
Income Tax Rules
“If not any big changes, FM Sitharaman can certainly consider some streamlining of income tax rules. She may hike standard deduction, basic exemption limit and extend tax benefits to encourage manufacturing, but these may not have any material impact on the deficit,” Jasani added.
The new tax regime on the personal income tax front can be made more attractive by either increasing the exemption income limit, raising the income tax rebate under Section 87A, or by reducing the highest surcharge rate.
“While the reduction in income tax rate looks difficult due to fiscal constraints, taxpayers expect some populist announcements like increase in the basic exemption & house rent allowance exemption under both new and old regimes. There might even be some fine-tunings made in the income tax structure to make the new regime the preferred route of taxation, to simplify the tax regime,” said Tanvi Kanchan, Head - Corporate Strategy, Anand Rathi Shares and Stock Brokers.
Sectors In Focus
Since it is an interim budget, sectors like railways, defense, infrastructure, power, renewable, auto, manufacturing, real estate, etc. will continue to remain under focus. The government is likely to continue with manufacturing incentives, support infrastructure-related capex in the country, and lay out a plan for disinvestments, according to analysts.
The government has focused on raising capex spending by over 30 per cent CAGR over the last three years, raising the budgeted capex target to 3.3 per cent of GDP, the highest in 18 years.
Nikunj Saraf, Vice President at Choice Wealth said, “While technically, the real estate and banking & financial services sectors are poised for outperformance in January ahead of the budget. The focus is on affordable housing within the real estate domain, positioning it as a pivotal element for economic growth. The real estate sector, vying for industry status, could positively influence related industries. Sectors like manufacturing and renewable energy are also likely to receive additional stimulus.”
Sneha Poddar, AVP, Fundamental Research, Broking and Distribution, Motilal Oswal Financial Services Ltd says the agriculture and rural related sectors like fertilizers, affordable housing, small finance banks, two-wheelers, would be in focus as the upcoming general elections may warrant some announcements for the rural economy and lower income class.
Fiscal Deficit Target
The most important thing to look out for would be the fiscal deficit target, which needs to be narrowed down. The government is aiming to narrow down the fiscal deficit to 4.50 per cent of GDP by the end of the 2025-26 fiscal year from 5.90 per cent in the current year to end-March 2024.
“Further the upcoming general elections may lead to some populist schemes to be included in the Interim Budget 2024-25. We can expect populist measures directed to the farm as the agricultural sector has been weak in the past few quarters. It may include expansion of the PM KISAN scheme or increased benefits in the form of an insurance scheme or higher MGNREGA allocation,” said Poddar.
However, the Budget 2024 is unlikely to make a significant impact on the stock market, but any major announcements will be taken into consideration for their potential impact. Usually, we have seen rallies before the budget as the expectation gets built up in the run-up to the event. Pre-budget rallies were seen in six out of the last 10 years, and post-budget, the market declined six times out of the past 10 years.
