Union Budget 2023 managed to meet and in some aspects outdoes market expectations, leading to a sharp rise in benchmark stock indices in Wednesday's trade. No bad news is good news. The Finance Minister did not tinker with long-term capital gains tax, which was a relief to the market. The highest-ever capex outlay, a 33 per cent jump over last year's was a surprise, as analysts were expecting not more than 15-20 per cent rise. A boost in terms of income tax could increase money at the hands of consumer, giving consumption a much-needed boost. A lower fiscal deficit target and lower market borrowing estimates also lifted market sentiment.
No bad news is good news
The FM left the long-term capital gains tax (LTCG) on equities unchanged. There were earlier expectations that the FM could tweak LTCG tax rate or the holding period for stock investments, to be considered as long term. Analysts had warned that any such move could send stocks tumbling. Equities attract 10 per cent LTCG tax, without indexation. This is against 20 per cent with indexation LTCG tax for debt mutual funds and real estate. The government also did not tinker with the holding period. LTCG applies to equity investments on a holding of one year or above. For debt mutual funds, that holding period is three years or above; for property, the holding period is two years or above.
Fiscal deficit
The fiscal deficit is estimated to be 5.9 per cent of GDP. FM Sitharaman noted that in her Budget speech 2021-22, she talked about her plans to continue the path of fiscal consolidation, reaching a fiscal deficit below 4.5 per cent by
2025-26, with a fairly steady decline over the period.
"We have adhered to this path, and I reiterate my intention to bring the fiscal deficit below 4.5 per cent of GDP by 2025-26," she said. Given the Budget 2023 was last full Budget before the country goes to poll in 2024, there were fears that the FM could announce a few populists measures. But the FM chose the fiscal prudence.
Highest-ever capex outlay
Capital investment outlay has been increased steeply for the third year in a row by 33 per cent to Rs 10 lakh crore, which would be 3.3 per cent of GDP, FM said. This will be almost three times the outlay in 2019-20.
"This substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowding private investments, and provide a cushion against global headwinds," she said.
Veer Trivedi, Research Analyst at SAMCO Securities said while the government was expected to continue with its momentum in Capex, the 33 per cent rise has come in as a surprise. Analysts were expecting a growth of 15-20 per cent.
Market borrowings
To finance the fiscal deficit in 2023-24, the net market borrowings from dated securities are estimated at Rs 11.8 lakh crore. The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs 15.4 lakh crore. Nomura India had expected gross borrowing at around Rs 15.5 lakh crore for FY24, up from Rs 14.20 in FY23.
"In Spite of spending on Capex, the government has managed to keep the market borrowings lower and parallel adherence to FRBM act by keeping fiscal deficit at 5.9 percent compared to 6.4 percent earlier," said Marzban Irani, CIO - Debt , LIC Mutual Fund.
Income tax sops
Finance Minister Nirmala Sitharaman, in a big announcement for the middle class during her Budgets announcements rejigged the income tax slabs. She said that those with an income of Rs 5 lakh and do not pay any income tax, the limit has been increased to Rs 7 lakh. FM Sitharaman also said that the number of slabs have been reduced from the six slabs introduced in 2020 to five and increase the tax exemption limit to Rs 3 lakh.
A revision in personal income tax slabs will aid consumption, said Kadam, Director – Listed Investments at Waterfield Advisors. "The Budget has put more money in the hands of the people through relief from Income Tax which to our mind is a very positive step," said S Ranganathan, Head of Research at LKP Securities.
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