I recently read a report by global consulting firm BCG, which mentioned that India generated a record USD 588 billion of financial wealth in 2023. In fact, the next few years look very promising as well.
By 2028, nearly 30% of financial wealth creation is expected to come from the Asia-Pacific (APAC) region, of which India is expected to add roughly USD 730 billion annually in the next four years.
As my co-founder Vaibhav Porwal mentioned in the May 2024 Monthly Market Update, the only thing that matters in wealth creation is long-term GDP growth.
India’s growth depends on how the government approaches various factors, such as the country’s monetary policy, tax reforms, infrastructure development, capital spending, etc. The Union Budget outlines all of these measures, which is, therefore, critical information for all wealth creators.
In this article, I’ll give you a brief snapshot of how India performed in 2023-24, draw inferences about the direction indicated by the Interim Budget, and then explain why the Union Budget 2024 is so important.
Let’s dive right in!
A brief snapshot of India’s performance in FY24 in 4 metrics
- GDP Growth Rate – India’s GDP grew by approximately 8.2% in FY24. This growth was driven by resurgent private consumption, robust investment, and a rebound in exports.
- Stock Market Performance – In FY24, the total market capitalisation of Indian companies on the Bombay Stock Exchange (BSE) crossed approximately USD 4.6 trillion, reflecting strong investor sentiment and corporate earnings growth.
Nifty 50 Index: The Nifty 50 index increased by around 30% in FY24, driven by robust retail participation and strong foreign portfolio investor (FPI) inflows, buoyant economic growth, healthy corporate earnings, and the anticipation of continued political stability.
- Record FDI Inflows – India attracted USD 71 billion in FDI during FY24, reflecting a 5% increase from the previous year. This influx underscores global investor confidence and the effectiveness of government policies aimed at improving the business environment. FDI inflows in construction (infrastructure activities), construction development and power sectors more than doubled in 2023-24.
- Employment – RBI data indicates that India added 46.7 million jobs in FY24, contrary to certain surveys pointing to high unemployment rates. Employment grew at 6% in FY24 versus 3.2% in FY23.
Economic aspects that matter – Looking forward
Now, let’s examine some indications from the Interim Budget that point to the direction taken by the newly formed government. I will touch upon the most important highlights and also discuss how the approach has changed in each of the following segments over last year’s Union Budget.
Fiscal discipline and growth – A balancing act
- One of the most notable aspects of the budget is its balanced approach to fiscal discipline and growth stimulation. The government has targeted a fiscal deficit of 5.1%, a reduction from last year’s 5.8% (revised estimate). That places it 0.5% away from the target of 4.5% by 2026. This move signals a commitment to prudent fiscal management while maintaining growth momentum.
- In comparison, the 2023 budget focused heavily on capital expenditure, allocating INR 10 lakh crore to infrastructure projects. This year, the allocation has been marginally increased to INR 10.5 lakh crore, with significant investments earmarked for green energy and digital infrastructure. This sustained emphasis on capital expenditure is crucial for long-term economic growth and employment generation.
- The focus of the Manmohan Singh-led UPA government’s 2009 budget was primarily on reviving the economy after the global financial crisis. The fiscal deficit was higher, reflecting the need for stimulus spending to boost demand. The shift from immediate fiscal expansion to a more balanced approach over the years highlights the evolving economic priorities.
Tax reforms and relief
Taxation remains a critical area where the 2024 budget is expected to introduce notable changes.
The number of taxpayers who filed income tax returns rose to nearly 82 million in FY24, 9% higher than in FY23. According to the Central Board of Direct Taxes (CBDT), net income tax receipts for FY24 rose to INR 19.58 trillion (USD 234.9 billion), up from INR 16.64 trillion in FY23.
- Tax slabs – A BankBazaar report proposes that the highest tax slabs of 20% and 30% should be updated for the old regime as they have been ‘frozen’ since 2013-14. This means that high-income earners continue to opt for the old regime, which offers greater deduction benefits, instead of the new regime, which the government seeks to make the default regime.
The report also recommends that the Union Budget 2024 raise the basic tax exemption limit to INR 5 lakh, as the tax slab rates remain unchanged as of the Interim Budget 2024. - Corporate tax – The continuity of lower corporate tax rates at 22% for domestic companies underlines the government’s pro-business stance. This is consistent with the 2022 and 2023 budgets, which maintained similar tax rates to foster a conducive business environment.
In FY24, corporate tax collections rose 10.26% to INR 9.11 trillion (USD 109.3 billion) from INR 8.26 trillion in FY23. - In contrast, the 2009 budget did not witness such aggressive tax reforms. The focus then was on stabilising the economy with more incremental changes in tax policies. The current approach of more significant tax reliefs reflects the government’s strategy to stimulate economic activity through enhanced consumer and corporate spending.
Digital transformation and green push
- Digital transformation – In March 2024, the Union Cabinet allocated INR 10,372 crore (USD 1.3 billion) for the India AI mission, setting a forward-looking agenda. This aligns with global trends, where technology is a crucial driver of economic growth and competitiveness.
- Green initiatives – The National Green Hydrogen Mission received an INR 600 crore allocation, a 102% increase from the 2023 budget. India’s commitment to reducing carbon emissions and transitioning to sustainable energy sources is part of a broader strategy to position India as a leader in green energy.
This is part of India’s commitment to achieving net-zero emissions by 2070. The budget also includes measures to promote electric vehicles (EVs) and energy-efficient technologies. - The 2023 budget laid the groundwork for these sectors, with significant investments in digital infrastructure and renewable energy. The continuity and enhancement of these investments indicate a long-term strategic vision aimed at transforming India’s economic landscape.
Healthcare and Rural Development
- Healthcare – The 2024 interim budget allocated 90,171 crore to healthcare, a marked increase from 79,221 crore in 2023. This substantial increase indicates a prioritised response to ongoing health challenges and the need to build resilient healthcare infrastructure in the country.
However, it is worth noting that India’s healthcare spending still stands far below the targeted 2.5% of GDP, which means there’s scope for a lot more. - Rural employment – The Interim Budget 2024 allocated INR 86,000 crore to the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), a significant increase of INR 26,000 crore over last year.
This suggests a strategic shift towards creating more skilled jobs through various new employment schemes rather than reliance on unskilled labour. - The current government’s approach of balancing welfare with skill development and long-term employment generation hints at the focus on sustainable economic empowerment.
Inflation and Monetary Policy
- Like the previous year, the government aims to keep inflation in the target range of 4-6%. The Reserve Bank of India (RBI) is expected to continue its accommodative monetary policy to support growth while closely monitoring inflationary pressures.
- Looking back, in 2009, inflation was a significant concern due to global economic volatility, and the government had to implement several measures to curb rising prices. The current government’s approach benefits from a relatively stable international environment but must navigate domestic challenges like supply chain disruptions and commodity price volatility.
Foreign Direct Investment (FDI) and Trade Policy
- FDI – The 2024 budget continues to emphasise attracting FDI with measures to simplify regulations and improve the ease of doing business. The government aims to attract USD 100 billion in FDI annually, building on the USD 71 billion achieved in FY24. The focus sectors include technology, renewable energy, and manufacturing.
- Trade policy – This has also seen a strategic shift with initiatives to boost exports through PLI schemes and improved logistics infrastructure. India’s overall exports hit a record USD 776.7 billion in FY24, driven by service exports, which grew to USD 339.6 billion in FY24, up 4.4% from USD 325.3 billion in 2022-23.
Some Sector-Specific Highlights
- Agriculture: The agriculture sector continues to receive attention with an INR 1.27 lakh crore allocation. This includes improving productivity, promoting agri-tech, and enhancing rural income. (As was also highlighted as an expectation from the Union Budget 2024 by Vaibhav Porwal, co-founder, Dezerv, in our Monthly Market Update of June 2024)
- Education: With INR 1.2 lakh crore allocated to education, the 2024 budget aims to enhance digital learning and vocational training. This is a minor increase over the INR 1.12 lakh crore allocated in 2023.
The FY 24-25 allocation for the Higher Education Department stood at INR 47619.77 crore, a marginal increase of INR 3525.15 crore compared to the FY 23-24 allocation of INR 44,094.62 crore.
There is a common consensus that the Union Budget 2024 needs to find a solution to fix India’s skill-led unemployment crisis. The government is expected to focus on skill development and digital literacy in this year’s budget. - Manufacturing: The Production Linked Incentive (PLI) scheme continues to receive support, with INR 6,200 crore allocated to boost manufacturing in key sectors like electronics, pharmaceuticals, and automobiles.
This initiative, introduced in the 2021 budget with a budget allocation of INR 1.97 lakh crore, aims to make India a global manufacturing hub. It covers 14 sectors, such as pharmaceuticals, automobiles, mobile phones, and electronic products.
Macroeconomic Stability and Growth Projections
The Reserve Bank of India (RBI) has upgraded its growth forecast for the fiscal year 2024-25 to 7.2%, up from 7%. The central bank believes a resurgence in private consumption, robust investment, and a rebound in exports will drive this increase.
The emphasis on infrastructure, digital economy, and green energy is expected to drive this growth. The government’s projection aligns with estimates from international bodies like the IMF, which forecast a robust growth trajectory for India.
Conclusion: Navigating the Road Ahead
Several points are to be noted here:
- The proposed increase in capital expenditure to INR 11.1 lakh crore for FY25, up from the current budget estimate of INR 10 lakh crore, represents 3.4% of GDP in FY25.
However, compared to the revised estimates for the current fiscal year, which are around INR 9.5 lakh crore, the proposed increase for FY25 is nearly 17%. This means that private investments will have to step up and fill the gap. - According to government data, government borrowing is being brought under control, which means that the central bank can potentially cut lending rates. Reduced lending rates also mean spurred domestic consumption, which is another positive as it drives growth.
No major policy changes are expected in the Union Budget 2024-25, and tax revenues are expected to remain stable. The focus areas would be maintaining fiscal discipline with targeted expenditure on welfare initiatives.
The coalition government’s Union Budget 2024 is crucial for the Indian stock market as well. Investors and market participants are hoping for a balanced approach that maintains current economic policies, emphasises infrastructure development, modernises key sectors such as railways and defence, and avoids negative changes to the capital gains tax.
Additionally, aggressive divestment of public sector undertakings (PSUs) and GST optimisation can boost market sentiment.
How the budget addresses these expectations will play a significant role in the stock market’s performance in the coming financial year. As we look forward to the budget release, we anticipate a forward-looking fiscal plan that fosters stability and sustainable economic growth.
Disclaimer: The information contained herein is for informational purposes and should not be interpreted as soliciting, advertising, or providing any advice.