The month of July witnessed marquee events, a union budget that centered around nine core areas and balanced fiscal prudence with growth. The lowering of fiscal deficit numbers to 4.9% compared to the previous 5.1% outlined in the previous budget, and a commitment to reach below 4.5% by FY 2025-26 is a huge positive. This crucial development lays the groundwork for a resilient economy, one that is capable of long-term growth and development. To read more about our budget outlook click here.
We expect to see a significant increase in tax as well as non-tax revenue and a positive gross tax to GDP (gross domestic product) ratio that is likely to lead to a widening of the tax base going forward. Overall, the government’s total non-debt receipts are estimated to increase by INR 1.27 trillion over the interim budget estimates. With a reduction in borrowing by INR 0.72 trillion, the government has created a space for private sector capex to take the baton from the government-led capex.
In addition to significant reforms that focus on growth, the budget proposed significant changes to both indirect and direct taxes, aiming to streamline the tax system and boost economic growth. The focus on creating a skilled workforce and ensuring higher productivity are important factors that are likely to drive the growth of the country in the coming months.
With India’s growth registering a healthy 8.2% for the financial year 2024, India retains its position as the fastest growing nation in the world. This growth has been largely driven by robust investment growth, lower WPI (Wholesale price index) in comparison to the last year and a significant increase in government spending both at a central as well as the State levels.
Sectors that have benefited from increased government spending have continued to do well over the past year. For example, sectors like mining, manufacturing and construction have witnessed significant growth, thus leading to a faster pace of development.
The top 10 sectors that did well during the month of July 2024 include healthcare, FMCG and technology to name a few. Despite starting the month of July with some weather-related challenges like a delayed monsoon, erratic rainfall and a slowdown in service exports, that was largely driven my weak global demand, the last quarter saw an increase in industrial production as well as an expansion of the Purchasing manager’s index, both in manufacturing and services. However, high and fluctuating food prices kept retail inflation from declining, despite a consistent drop in core inflation. Conversely, WPI climbed steadily throughout the quarter, peaking at a 16-month high in June. This peak was mainly driven by increases in food and energy prices.
Sectors that did not perform as expected, during the month include realty, metals, industrials, etc. Recent debates and discussions around a correction in realty prices have likely impacted the sector, while we’re more likely seeing some short-term underperformance in the metals sector. Despite a positive sales growth in the autos sector, concerns around high inventory levels and low tractor sales have impacted the Auto and Auto Ancillaries sector. Overall, we think that these driven by short term factors which will see a reversal over the next quarter or so.
Overall, we think that India is poised for growth owing to multiple factors. A strong private sector balance sheet, increase in exports, increased focus on capex spending, impact of structural reforms and a focus on the creation of a skilled workforce are just some of the factors that will lead the mantle.
The month of August is likely to remain an interesting one as we look forward to the positive impact of a stable interest rate regime. The government’s focus remains grounded on keeping inflation levels under control, despite witnessing international rate cuts. This move is a clear indication of the country’s resilience and RBI’s strategic balancing act of nurturing the economy and preempting inflationary spirals. Having said that, risks in the form of geopolitical tensions, continue to pose threats around supply chain disruptions, that could lead to a significant increase in commodity prices.
