Budget FY 23-24: With general elections around the corner, will we get a populist budget?

Union Budget 2023-24 is important not only from an economic point of view but also has political significance given the General Elections in May 2024. Logically, the ruling party would not want to rock the boat ahead of elections. So do not expect any pathbreaking reforms or policy announcements in this Budget.

However, we also don’t believe that the government would turn outright populist ahead of the elections. Taking a cue from the Union Budget of 2018-19 (full year Budget before the general elections in 2019), the policy focus would remain on increasing the outlay for capital expenditure to sustain healthy growth in the economy. Also, the government would also look to take measures to support the nascent uptrend in the real estate sector and the capex by the private sector. These three engines of economic growth are essential for a multi-year economic upcycle in India despite the challenging macro environment globally.

Lastly, the finance minister could also announce some policy measures to ease the pain faced by the farmers and urban working-class strata. Rising farm input costs and other inflationary pressures have limited the growth in income while the cost of living has gone up materially due to high food & fuel inflation.

From a fiscal health perspective, the government is likely to comfortably achieve the 6.4 per cent fiscal deficit target in FY2023 on the back of buoyancy in the tax revenues. For next year, the government would gradually move towards the guided path of fiscal consolidation which could mean 50-60 bps reduction in the fiscal deficit target each fiscal year to reach the stated goal of 4.5 per cent fiscal deficit figure by FY2025-26.

From the capital market’s perspective, a lot has been done lately in terms of regulatory changes aimed at protecting and safeguarding the interest of retail investors. However, the transaction cost and impact cost continue to be quite high. On the eve of every Budget, most capital market participants hope for rationalisation of Securities Transaction Tax (STT) which would further boost liquidity and consequently could lower the impact cost in the Indian equity market.

Second, there has been some media coverage on the possible revamp of capital gains tax. Currently, the structure is quite complex and varies among asset classes. Accordingly, the government has been indicating the possibility of keeping the same holding period across asset classes to avail of long-term capital gains (LTCG) tax benefits. 

Interestingly, the government had levied LTCG at a rate of 10 per cent on the equity returns of over Rs1 lakh in the Union Budget 2018-19 prior to the General Elections in 2019. Equity markets did react negatively to the news but recovered quickly. So going by past experience, any tinkering with the LCTG regime should not have a lasting or material impact on the Indian equity market.

Overall, the Budget is likely to follow fiscal prudence despite political compulsions. The focus areas are expected to be an increase in the capital outlay to sustain economic growth and finding resources to provide some relief to farmers and the working class that are facing stress due to the inflationary conditions. Though the budget is not likely to have any material impact on the Indian equity markets, there would be certain pockets that would gain from higher budgetary allocations like infrastructure, defence, railways, production linked incentive (PLI) scheme, and green energy in the Union Budget.

(Parminder Varma is the Whole-time Director and Chief Business Officer of Sharekhan by BNP Paribas)

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