Finance Minister Nirmala Sitharaman is poised to present the Union Budget on July 23 amidst soaring expectations. Despite India’s impressive 8.2% growth in FY 2023-24, the highest among major economies globally, the nation grapples with significant challenges, including sluggish consumption growth and tepid private investments.

Indian Government Under Pressure

The Modi administration faces pressure to stimulate consumption and create employment opportunities for the country’s large workforce. With 67% of India’s population in the working-age group (15 to 64 years), as estimated by the UN, addressing employment generation is a top priority.

Prime Minister Narendra Modi has been actively engaging with economists to explore strategies for accelerating growth and employment across sectors and regions. Experts have highlighted the importance of creating more disposable income through tax cuts and cash income support schemes.

One of the anticipated measures includes increasing the PM Kisan Nidhi payout from ₹6,000 annually to ₹8,000-9,000 to offset inflation over the past five years. This move could potentially benefit the ruling party in the upcoming state elections.

Indian Economy’s Growth Needs Consumption & Demand

India’s robust economic growth contrasts starkly with the underlying issues of weak consumption and investment. Private final consumption expenditure (PFCE), which constituted 55.8% of GDP in FY 2023-24, grew at just 4%, marking a two-decade low (excluding the pandemic year). This slow growth in consumption underscores the persistent rural distress, despite governmental measures such as providing free ration to 80 crore people.

Agricultural growth, a critical component of rural income, was a mere 1.4% in fiscal 2024, significantly below the pre-pandemic decade average of 4.4%. This stagnation in agricultural growth is a key indicator of the broader issues affecting rural demand and consumption. Additionally, household debt reached a record 39.1% of GDP in Q3 FY 2023-24, a 16.5% year-on-year increase, highlighting widespread financial strain among households.

Despite the challenges, India’s economic outlook remains positive. The Reserve Bank of India (RBI) projects a 7.2% growth rate for 2024-25. Factors supporting this growth include recovering private consumption, continued investment activity, the government’s focus on capital spending, and improved balance sheets of the corporate and banking sectors.

Budget 2024 Expectation: Fiscal Deficit Reduction

The interim Budget presented in February estimated a fiscal deficit of 5.1% for the current fiscal year. However, the government is expected to lower the fiscal deficit to 4.9-5% of GDP for the current financial year. This reduction is noteworthy as it does not compromise the capital expenditure target of ₹11.1 lakh crore. In the previous financial year, the government achieved a fiscal deficit of 5.6% of GDP, indicating a significant reduction effort. And the government will achieve this reduction by leveraging revenue buoyancy to achieve this goal i.e. the government’s revenue is expected to grow at a similar or higher rate as the economy, reducing the need for borrowing and allowing for better fiscal planning and stability.

Revenue Buoyancy and Market Borrowings

Revenue buoyancy plays a critical role in the government’s ability to lower the fiscal deficit. Incremental revenue receipts of ₹1.2 lakh crore provide the flexibility to increase revenue spending and facilitate fiscal consolidation. This additional revenue could be used to spur consumption through income tax sops, enhancing disposable income and stimulating economic activity.

Furthermore, the government is likely to reduce net market borrowings for the current financial year by ₹35,000-₹55,000 crore compared to the interim Budget estimate of ₹11.8 lakh crore. This reduction is expected to benefit bond yields, particularly with the inclusion of government securities in the J.P. Morgan Government Bond Index, boosting demand for these securities.

Long-term Fiscal Consolidation

Reducing the absolute size of the fiscal deficit over the next 3-4 years poses a challenge. The decline in the fiscal deficit-to-GDP ratio will largely depend on the increase in nominal GDP. If the government maintains capital expenditure (capex) at 3.4% of GDP over the medium term, incremental fiscal consolidation would require sustained compression in the revenue deficit.

The government has also 'on-budgeted' a significant portion of previously off-budget capex. This inclusion should be considered when determining the endpoint of the fresh fiscal consolidation roadmap beyond Fiscal 2026. Assuming that capex of about 1% of GDP has been brought on budget, the government could further reduce its fiscal deficit target to 4% of GDP over the medium term, aiming for a sub-4.5% target by Fiscal 2026.

Budget 2024 Expectation: Boosting Private Investment

Private investment in India saw a significant surge post-liberalization until the global financial crisis of 2007-08, peaking at around 27% of GDP from about 10% in the 1980s. However, since 2011-12, private investment has been on a decline, hitting a low of 19.6% of GDP in FY 2020-21 (excluding the pandemic year, when it dropped to around 10%).

In Modi 2.0's first budget in FY 2019-20, the government slashed the corporate tax rate from 30% to 22% to stimulate private investment. Unfortunately, this coincided with the onset of COVID-19, which dampened demand for goods and services, thereby limiting the intended benefits of the tax cuts in stimulating fresh capital expenditure and job creation.

The tax cut potentially provided around ₹5 lakh crore in benefits to the corporate sector over the last five years. Individual tax collections in India surged by a remarkable 76% between FY 2018-19 and FY 2022-23. However, the corporate sector's share of these tax collections increased only marginally, to just 24.45%.

The corporate sector is holding back on capital expenditure due to sluggish demand, evident from manufacturing companies operating at only 64% capacity utilization in the September quarter of FY 2023-24. The optimal capacity utilization for stimulating fresh investments is around 85%, underscoring the urgent need for boosting consumption to revive the economy.

Budget 2024 Expectation: Tax Relief For Salaried Class

Experts predict lower income tax rates under the new tax regime for those earning up to ₹10 lakh, with potential relief for higher earners above ₹15 lakh as well. Key expectations include increasing the basic exemption limit from ₹3 lakh to ₹5 lakh, reducing tax liabilities, and enhancing deductions for standard deductions, 80C, 80D, and housing loan interest under Section 24. These measures aim to reduce the tax burden, boost consumption, and increase disposable income, addressing the high cost of living and encouraging savings among lower and higher-income groups.

This could also trigger a much needed multiplier effect to improve corporate operating ratios, and stimulate capital expenditure and job creation.

Budget 2024 Expectation: Building Skilled Workforce & Solving Unemployment

Unemployment rate has risen to an 8 month high of 9.2% in June 2024, up from 7% in May, according to the CMIE. Previous budget for 2023-24 saw a reduction in the allocation to the Ministry of Labour and Employment from Rs 16,893.68 crore to Rs 13,221.73 crore, focusing more on infrastructure investment than directly tackling unemployment. Workers' unions and activists criticized the budget for its lack of substantial measures for job creation and social security.

Expectations for the upcoming budget include demands from employee unions for the establishment of the 8th Pay Commission, the restoration of the Old Pension Scheme, and filling existing job vacancies. Economists anticipate the budget will emphasize job creation through labor-intensive manufacturing, particularly in sectors like toys, textiles, and apparel, along with incentives for commercial aircraft manufacturing.

Additionally, with the increasing push for Artificial Intelligence, there are recommendations for provisions to re-skill workers affected by AI, including a proposal for a 'robot tax' from organizations like the Swadeshi Jagran Manch and Bharatiya Kisan Sangh.

Allocation to MGNREGA Unlikely to Increase

MRNREGA, the national rural job guarantee scheme, a lifeline for millions of Indians, is unlikely to receive a higher allocation in this year's Union budget. Interim budget estimates, which stand at ₹60,000 crore for FY24 and ₹86,000 crore for FY25. Despite the high demand for rural jobs resulting in actual spending reaching ₹1.06 trillion in FY24, the government may only adjust allocations later based on necessity. This was particularly contentious, with concerns that it would exacerbate rural distress and drive more workers to already strained urban areas.

1. In June, about 34.25 million individuals sought work under MGNREGS, a 22.5% decrease from the previous year, with 27.19 million seeking work in May, a 14.3% drop from last year. Economists attribute stagnant rural consumption and weak FMCG growth to lower demand for guaranteed rural jobs.

2. The budget might also announce initiatives to add more women to the Lakhpati Didi self-help group (SHG) list. A proposal aims to include 1.1 million SHG members as Lakhpati Didis under the Deendayal Antyodaya Yojana over the next five years.

Indian Capital Goods, Construction & Infrastructure Sectors Expectation

The capital goods sector, which has experienced a sluggish start to the fiscal year due to elections, is expected to gain momentum as the government continues its emphasis on capital expenditure (capex) and infrastructure development. Despite the lack of major changes anticipated from the interim budget, analysts forecast a robust capex plan for FY25, including a significant focus on the Production-Linked Incentive (PLI) scheme. Capital Goods, Construction, Infrastructure and related stocks remain highly active, driven by expectations of significant capital expenditure (capex) announcements in the upcoming Budget.

1. Experts predict that the government will adhere to its capex estimate of Rs 11.1 lakh crore as outlined in the Interim Budget, with a strong emphasis on roads, power, urban development, and railways, which are expected to generate long-term economic benefits.

2. Companies like ABB, Siemens, and L&T, with substantial order books, are well-positioned to benefit from the projected strong execution of these plans, ensuring revenue visibility for the next one to two years.

3. Analysts foresee a healthy increase in capital outlay for infrastructure in the Union Budget 2024-25 to align with the goals of the National Infrastructure Pipeline and Gati Shakti Master Plan.

4. Significant focus anticipated on key segments like roads, railways, airports, and urban infrastructure.

5. A 10-15% year-on-year increase in allocation for the Ministry of Road Transport & Highways is expected, focusing on expanding the road network. The Union government is expected to introduce the Vision 2047 plan in the upcoming budget, aiming to build over ₹20 trillion worth of roads in the next decade, following the suspension of the Bharatmala-1 scheme. This plan targets the construction of at least 50,000 km of access-controlled highways, integrating leftover projects from Bharatmala-1 and proposed constructions from phase 2.

6. Companies involved in highways, railways, and urban infrastructure projects are expected to benefit significantly from the Budget’s focus on infrastructure development.

7. Major highway projects under the National Infrastructure Plan (NIP) are expected to boost cement demand, benefiting companies like UltraTech Cement, Ambuja Cements, Dalmia Bharat, JK Cement, JK Lakshmi, and Birla Corp.

8. Renewed focus on affordable housing schemes in rural markets could positively impact urban developers like MICL and TARC.

Indian Power & Green Energy Sectors Expectation:

India’s power demand has grown significantly, with a 7.3% year-on-year increase in FY24 and a 5% CAGR over the past five years. This growth is driven by higher per capita consumption and initiatives like Make in India and PLI schemes. Peak demand is projected to reach 370 GW by 2030, necessitating substantial investments in thermal capacity, offshore wind, battery storage, and hydrogen data centers, presenting a Rs 42 lakh crore opportunity.

1. Among the top expectations are incentives and improved financing for renewable energy projects. On the taxation front, the industry hopes for a reduction in GST on renewable energy components and the removal or reduction of customs duties on imported components like solar modules and storage batteries.

2. Budgetary allocations are also anticipated for rooftop solar installations and alternative energy sources such as compressed biogas (CBG), ethanol , and green hydrogen. The National Green Hydrogen Mission, which received an allocation boost to Rs 600 crore in the interim Budget, is expected to see further increases.

3. The industry is seeking support for the hydropower sector, including the establishment of a nodal agency for hydropower development and incentives for pumped storage hydropower plants.

4. Additionally, there is a call for extending the eligibility for the ISTS waiver for renewable projects beyond June 2025.

5. The government plans to add 50-55 gigawatts of thermal power over the next six to seven years, benefiting conventional thermal players like BHEL. Transmission line companies and power equipment manufacturers are also set to gain from the need for evacuation systems. Companies like Suzlon are expected to benefit from offshore wind power projects and increased wind installations.

6. In FY24, India imported solar cells and panels worth over Rs 51,460 crore, a 2.84x increase from the previous year. The lower landed cost of imported solar panels - 4 cents per watt cheaper than domestic panels—has driven this surge in imports, despite a 25% basic customs duty on solar cell imports. To reduce reliance on imports and boost domestic production, adjustments to the customs duty on solar cells or the expansion of production-linked incentive (PLI) schemes for solar cell and panel manufacturing are needed.

Indian AI & Data Centre Sector Expectation

India offers cost advantages for data centre setups, primarily due to lower real estate costs. The country's data centre capacity is expected to double to around 1,950 MW by 2026, requiring ₹50,000 crore in investments. Upcoming government budget measures may include tax incentives, infrastructure development, renewable energy subsidies, and streamlined policies to support this growth.

1. India's data centre market, currently valued at $4.5 billion, is expected to grow to $11.6 billion by 2032, outpacing global growth. Major global and domestic companies like Amazon, Microsoft, Google, Reliance Jio, and Adani Group are investing significantly in the sector.

2. Challenges such as lengthy approval processes and high operational costs related to power and cooling persist. Government incentives for renewable energy adoption could reduce costs and promote sustainability.

Government Intervention Needed For A Viksit Bharat by 2047

This Budget aims to set the foundation for India's journey towards becoming a developed nation (Viksit Bharat) by 2047. Achieving a lower fiscal deficit while maintaining robust capital expenditure is crucial for this long-term vision. The government’s strategy includes leveraging revenue buoyancy, reducing market borrowings, and maintaining high levels of capex to drive growth and development.

The government needs to emphasize infrastructure development, incentivizing the manufacturing sector, and job creation. However, balancing growth with fiscal discipline will be crucial, especially in the face of political pressures from allies. Enhancing fund allocation for health, education, and skilling is also anticipated, given the transformative impact of technology on the nature of work. Upskilling the youth, who constitute a significant portion of the population, is seen as a critical area for government intervention.

Manufacturing Boost:

• Elevate domestic manufacturing to become a global hub.

• Comprehensive planning for high-tech sectors (defense, electronics, semiconductors).

• Strengthen MSMEs through government-industry collaboration.

Simplified Tax Structure:

• Further simplify the tax regime for ease of doing business.

• Streamline capital gains tax with fewer categories and uniform rates.

• Rationalize TDS rate structure to ease compliance and reduce litigation.

R&D Enhancement:

• Increase R&D spending to over 1% of GDP.

• Operationalize the ₹1 trillion corpus for research in sunrise sectors.

• Foster innovation clusters through collaboration among private sector, academia, and government.

Skills and Quality Jobs:

• Address unemployment and skill gaps.

• Increase vocational training spending.

• Explore public-private partnership models to align skills with industry needs.

Women's Workforce Participation:

• Increase female workforce participation to boost economic growth.

• Support women in manufacturing roles and entrepreneurship.

• Improve market access, finance, and capital for women entrepreneurs.

Farm-to-Fork Economy:

• Enhance agricultural productivity with policy interventions.

• Launch agricultural yields mission for low-performing districts.

• Develop farm gate infrastructure to reduce post-harvest losses and modernize agriculture.

Sustainability Focus:

• Aim for ‘net zero’ emissions by 2070 with enabling policies.

• Promote resource circularity and green finance taxonomy.

• Create pathways for green transitions and a national circular economy framework.

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