Finance Minister Nirmala Sitharaman is preparing to present the Union Budget 2024 on July 23, and we are expecting a comprehensive roadmap for 'Viksit Bharat by 2047, building on the themes she introduced during the interim Budget presentation on February 1. This ambitious vision aims to position India as a developed nation by 2047, marking the 100th anniversary of its independence.
According to brokerage firm Morgan Stanley, the Finance Minister will probably retain the central government's fiscal deficit target at 5.1% of GDP for the fiscal year 2025, with a path set to achieve a target of 4.5% by fiscal year 2026.
For Indian stock market investors, Morgan Stanley advises focusing on three critical aspects in the forthcoming Union Budget 2024: fiscal consolidation, infrastructure spending, and sector-wise investment incentives.
Fiscal Consolidation
The fiscal deficit target is crucial for market sentiment. Any deviation from the fiscal deficit target can influence the stock market's performance. Morgan Stanley points out that the equity market might not react favorably to a reduction in fiscal deficit below 5 percent. A key component of the budget, fiscal discipline is anticipated to demonstrate the government’s commitment to long-term economic stability and sustainable growth.
Infrastructure Spending
Another vital element that can potentially impact the market dynamics is infrastructure spending. Increased expenditure on physical and social infrastructure, particularly in rural areas, is expected to stimulate economic activity and job creation. Morgan Stanley anticipates a 20-25 basis points increase in GDP spending on infrastructure compared to the interim budget. This focus on infrastructure can lead to better performance in consumer discretionary and industrial stocks.
Sector-Level Incentives
The stock market may get surprises in the form of sector-specific incentives instead of broad tax cuts or redistribution measures. Morgan Stanley does not expect major changes to capital gains tax rates for equities. Instead, targeted incentives and spending within specific sectors may prove to be crucial. The brokerage firm remains overweight on Financials, Consumer Discretionary, Industrials, and Technology, suggesting these sectors are well-positioned to benefit from the anticipated budget allocations.
The Union Budget has a history of having varied impacts on the stock market. According to Morgan Stanley's analysis, the stock market tends to fall on two out of three occasions in the 30 days following the budget presentation. The likelihood of a post-budget correction increases to 80% if the market has risen in the 30 days preceding the budget. This year, with the Indian stock market tracking higher on both absolute and relative bases, there is a strong chance of a correction post-budget if current performance levels are maintained into the budget day.
Equity Market Strategy
The influence of the budget on the Indian stock market has decreased over time, but pre-budget expectations continue to play a significant role. The market is currently experiencing a tangible sense of enthusiasm, which could result in volatility and possible corrections after the budget. As an investor, you must keep a careful eye on the degree of fiscal consolidation, infrastructure spending, and sector-specific incentives.
The Union Budget 2024, which Finance Minister Nirmala Sitharaman is set to unveil, is anticipated to be shaped by market dynamics and fiscal restraint, infrastructure spending, and sector-specific incentives. Morgan Stanley advises the Indian investors to maintain a watchful eye on the comprehensive policies disclosed in the budget. These policies will offer important perspectives into the government’s economic outlook for the upcoming years. The ‘Viksit Bharat by 2047’ program is expected to set the groundwork for India’s development.