Given the Indian economy’s needs and the government’s previously outlined economic vision for the next 25 years, expectations for Budget 2023 were high. Other realistic factors, such as the lingering fiscal impact of COVID-19 relief measures, persistent global inflation in recent quarters, rising interest rates, and slowing economic growth, kept expectations in check. In such a situation, the Finance Minister’s Budget successfully walks the tightrope and checks all the right boxes.
Most importantly, the Budget reaffirmed the government’s determination to continue with fiscal consolidation. Apart from maintaining macroeconomic stability by operating within means, the budget managed to maintain the focus on infrastructure, long-term capacity building, and much-needed taxation framework tweaks to optimise tax mobilisation, bring more people into the formal economy, and boost consumption and higher savings.
Strengthening the Economic Foundation
The government’s emphasis on infrastructure strengthening was expected, as it had been in previous Budgets. The massive outlay for capital expenditure – a 33 percent increase – was both surprising and reassuring. All infrastructure pockets, such as roads, railways, and ports, now have significantly expanded capex plans. A capex increase has been shown to have a multiplier effect on the economy. Higher efficiency brought about by infrastructure development expands services and other business opportunities, thereby increasing economic productivity. Capex will also result in job creation across the country, which will have long-term benefits.
Long-Term Capacity Development
The Budget also includes many softer touches that may not have an immediate financial impact but may change the dynamics for a variety of businesses and services over time. One such development is the announcement of steps to simplify compliance and KYC (know-your-customer) systems. These small but significant changes could lead to the inclusion of new businesses, users, and investors in the financial services ecosystem on a large scale.
Increase Consumption and Savings
The Budget also responded to income taxpayers’ requests by lowering their tax liability through changes to the New Tax Regime.
The reorganisation of tax slabs and the move to effectively raise the tax exemption limit to Rs 7 lakh will not only put more money in the hands of taxpayers, but it may also increase tax compliance by broadening the taxpayer base. Higher disposable income will not only increase consumption in the short term, but it may also lead to increased savings and investments in the long run.
The nudge created for higher-income taxpayers by lowering the tax surcharge is likely to boost consumption, savings, and investment.
The Way Forward for Investors
The Indian economy continues to be one of the world’s fastest growing. Recent trends indicate that inflation is under control, which alleviates concerns about the Reserve Bank of India raising interest rates significantly in the near future. Another bright spot is the consistently improving credit demand.
With these green shoots and the government’s direct and indirect consumption push in Budget 2023, optimism about the Indian economy and markets remains high. Despite short-term volatility and slightly higher valuations, long-term investors should allocate a portion of their investments to Indian equity in accordance with their financial objectives and risk tolerance. With the prevalent elevated yields, debt mutual funds remain an appealing and tax-efficient proposition for medium to long-term investors. Hybrid funds, particularly conservative hybrid strategies, may be an appropriate choice for investors who are new to the market and want to dip their toes in the water.
Conclusion
The Budget presented a pragmatic approach to achieving the country’s holistic and inclusive economic development. As a result, its positive impact will be felt throughout the economy. Investors should take note of the Budget’s message. Those who remain invested in India are likely to reap the benefits of this growth story as it unfolds.
