Budget 2023: Need of the hour is a bold bet on capex

The Budget for 2023 is a crucial one as it would have to strengthen the foundations of India’s momentum with the rest of the world staring at a recession, and this being the last full-year budget ahead of Lok Sabha elections in 2024. In this backdrop, the Budget has a possibility of landing anywhere between bold and benevolent, and we reckon there's a strong case for the former. 

As election year approaches, the government would be keen on keeping up with infrastructure development. As a policy decision, the infrastructure push has worked towards spurring growth, and keeping India high up on a relative scale globally. More importantly, it also proves to be a tangible perception-builder, where people see evident benefits in their daily lives, thereby also giving these reforms a rather social shade. 

But does the Budget have room for building higher economic and social capital through capex? Definitely, and for two reasons.  

First, monetary policy being able to successfully tackle the inflation problem, leaves room for an expansionary fiscal policy, especially when growth has slowed down to 6.3 per cent in 2QFY23, versus 8.7 per cent in FY22. After all, inflation at 5.9 per cent in November has slowed down to a 11-month low and come close to RBI’s comfort zone.  

Second, subsidies on fertilisers, food and petroleum have already taken up >60 per cent of the annual budget. After the last couple of years being marked by a sizeable reduction in fiscal deficit, this year looks like a tightrope. However, with prices easing, and the worst being behind, there is a case for this burden coming off in FY24, leaving more fiscal room, while still maintaining a gradual consolidation path. Continued focus on quality over quantity, as over the last couple of years, would further increase headroom. 

With this, the Union Budget may set the capex target for the next financial year at upwards of Rs. 9 lakh crore, which would represent a 20 per cent rise from the Budget estimate for FY23. 

For the markets, this would imply a good opportunity in the sectors of cement, construction, defence, engineering, infrastructure, and rail. 

This also syncs-in well with historical trends, where in most of the last ten election cycles, infrastructure spending and benefits to ancillary sectors have seen massive growth in the last two years before a general election. 

Take cement for example. Over most of the last ten election cycles, cement demand has seen a major rise in the last two years of the five-year cycles. For FY24, higher government demand coupled with easing prices are a perfect mix for cement stocks to do well. 

That said, higher interest rates do dilute the ability for private capex to revive. But there’s enough visibility for the interest rate regime to plateau and even may-haps reverse in the next year. That aside, the budget is anyway likely to lay greater focus on boosting domestic manufacturing to capitalise on global supply chain disruptions, import substitution and redistribution of global supply priorities. 

This would bode well for stocks that can benefit from themes directly associated with domestic manufacturing in the areas of auto components, chemicals, electrical goods, and industrial components.  

The ethos of the budget is likely to be a pursuit of aggressive spending, with a focus on revival of public and private capex to spur economic growth. It won't be surprising for major direct tax rationalisation to not be undertaken as subsidies, easing inflation, and relatively-lower-sensitivity of consumption are anyway in play, deeming a higher focus on supply than demand, making a strong case for bold over benevolence. 

Other than betting on, and skewing allocation towards sectors benefiting from a revival in capex, there are multiple interesting opportunities emerging in the mid and small cap space, of companies that have been seeing benefits of aggressive capacity-building, PLI-related incentives and import demand associated with a China-substitution. 

Views are personal. The author is WealthBasket Advisor and founder of Rupeeting.

Also Read: Budget 2023: What’s the difference between old tax regime and 2020 tax regime?