Budget 2023 likely to be populist without compromising on growth

• We expect continued thrust on capital expenditure focused on infrastructure build out as construction pulls labour in from rural areas and this can prevent a recurrence of rural distress in the lead up to the elections.
  
• Disinvestment targets need to be pruned after successive years of disappointments.
  
• There is a risk of customs duties being raised on selective items as this government has been inclined to be protectionist in its pursuit of domestic manufacturing.
  
• Simplified capital-gains tax structure, and increase in 80C deduction limit and general tax exemption limit are some key expectations from Budget 2023.

This year’s budget is of high importance for the government, heading into the Lok Sabha election year of 2024. We expect Budget 2023 to reduce the burden on the middle and lower middle class without compromising on the growth aspect. We think that the government will continue to be fiscally conservative. It will attempt some populist measures, but the food subsidy being cut gives it the room to do this up to ₹1 lakh crore. There is a risk of customs duties being raised on selective items as this government has been inclined to be protectionist in its pursuit of domestic manufacturing. We expect continued thrust on capital expenditure focused on infrastructure build out as construction pulls labour in from rural areas and this can prevent a recurrence of rural distress in the lead up to the elections.

India’s current account deficit will likely expand over 3.5% of gross domestic product (GDP), courtesy of high commodity prices. But, if Brent crude stays near current levels of $85/barrel (our base case), current account deficit can dip below 3%, and the Indian Rupee stays stable.

Disinvestment targets need to be pruned after successive years of disappointments. Further, tax collections have been strong, so there may not be a pressing need for the central government to project a large amount here. We expect budgeted amounts for food, fuel and fertiliser subsidies to come off year-on-year by ₹2 lakh crore, which should mean 5.7-5.8% fiscal deficit projection is possible and the medium-term fiscal consolidation programme stays on track. Strength in tax collections means that investment spending will rise, but we think on a strict apples-to-apples basis, by around 12-15%.

Considering this is the last full-term budget, expectations have increased significantly from all quarters. Here are the five key expectations based on our house view.

Agriculture: Fertiliser subsidy disbursements have picked up steam from September 2022 onwards – the government has disbursed ~₹40,000- ₹50,000 crore of subsidy in the last couple of months. This augurs well for fertiliser players, considering the relief on working capital pressures. Owing to the correction in input prices, the subsidy is likely to be lower as compared to ~₹2.2-₹2.5 lakh crore in FY23. We look forward to farmer-friendly policies, given that it is a pre-election year.

Increase in 80C deduction limit: The deduction limit on 80C exemption has been stagnant for nearly a decade and hence we expect an increase in limit from ₹1.5lakh to ₹2.5lakh this year.

Basic exemption: The basic exemption limit for tax is currently at ₹5 lakh and has not been changed for close to a decade. We expect the basic exemption limits to be increased and the tax slabs to be changed in order to reduce the tax liability on the taxpayers.

Simplified capital-gains tax structure: Capital-gains tax is very complicated in India with different holding periods for the different asset classes. Different tax rates are applied to these gains. A simplified capital- gains tax structure would reduce disputes and litigations.

Increase in exemption for housing loan interest: In order to boost real estate and affordable housing schemes, we expect an increase in housing loan interest waiver from the existing ₹2 lakh.

(R Venkataraman is Chairman, IIFL Securities)