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Budget 2024: Smoothly Downshifting 🏁

For a lot of people, Lewis Hamilton moving to Ferrari made bigger news than the interim budget. And indeed it was a budget lacking either any crowd-cheering populist moves, or eye-popping reformist steps.

But in that almost-dull announcement, which was accompanied by the Finance Minister’s shortest speech lasting less than an hour, was a directional change. A relatively tame stance, which perhaps even sets the tone for the next couple of years.

Letting the engine cool

All eyes were on the infra capex number, which at Rs. 11 lakh crore marked an 11% increase over last year’s spend. And while a double-digit growth number appears attractive, this budget’s allocation shadows the aggression seen over the government’s term, where capex outlay went 3x in just the last 4 years.

Within the moderate infra spend were more lacklustre numbers with a mere 3% hike in the allocation to the road sector, and 6% raise in the rail outlay. The announcement of three new rail corridors and the conversion of 40,000 bogies to Vande Bharat seem like a dampener compared to showstoppers from the past.

And while the government pressed on the gas peddle a little less hard this time, it also steered steeply back towards fiscal prudence. This became the standout feature of the budget with the FY25 fiscal deficit target set at 5.1%, and a glide path of 4.5% by FY26.

Enough reason to shift gears

The downshift may have been rather counter-intuitive given the criticality of the interim budget in terms of proximity to the election. However, some context-setting does give way for the shift in stance to appear extremely rational and appropriately timed.

  • The government getting aggressive on spend by moving fiscal deficit to the sidelines was a need of the hour post the pandemic, and later to deal with an inflation-related economic turbulence - both of which are diminished problems now

  • Monetary policy has been contractionary over the last couple of years, and while it has neutralised now, eyes are set on an expansionary turn later in 2024. With this the burden of stimulus can be passed on from fiscal to monetary policy

  • Policy initiatives over the last few years to boost manufacturing are likely to result in a pick-up of the private capex cycle, which is likely to result in shared responsibility of stimulus between the state and corporate India

Eyes not off growth though

While the budget indicated moderation of stimulus, the government’s focus on long term growth was very encouraging. Working towards the goal of making India a developed nation by 2047 has been a positive factor.

Several of the softer aspects of the budget like job creation, energy transition, digital infrastructure, rural housing, education, etc. were aligned to this goal. And the lack of populist measures in the form of freebies was a refreshing affirmation of serious long-term orientation.

Despite the change in direction, the narrative of it being India’s decade, and India standing out as the most preferred investment destination are likely to remain upbeat.

What about the markets?

The markets though could take an interim breather if there were to be a gap created between fiscal spending moderating and private capex picking up and/or monetary policy becoming supportive. At high valuations, any moderation on growth could turn out expensive, especially for mid and small caps.

Risk appears to be particularly high where stock price appreciation has been narrative or expectation-driven. Take railway stocks for example. Budget announcements or allocation don’t seem to do justice to the pre-budget rally seen in these stocks. A reversal of these gains could be visible sooner than later.

But on the other hand, sectors like power continue to see tailwinds. The budget’s focus on renewable energy with a proposal for rooftop solar aid for 1 crore homes, and ongoing longer-duration projects around grid modernisation bode well for larger names like NTPC and Tata Power.

In this scenario, we are adopting an investment strategy that is highly selective on sectors, focuses on good quality stock-picking and which creates safety-nets to minimise downturns, while remaining confident of the long term direction of the markets.

After all, no pole position is achieved without a pitstop!

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