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Expansion of capex to tackle global issues and decline in economic growth
Equities, Markets - January 27, 2025

Expansion of capex to tackle global issues and decline in economic growth

Expansion of capex to tackle global issues and decline in economic growth

In present times, India is facing the issue of moderate economic growth and global tensions. In this scenario, the upcoming budget focuses on keeping the same fiscal strategy which was implemented for the previous four years. The policy also focuses on the strategy of fiscal consolidation and at the same time keeping budget expenditure higher than before pandemic expenditure levels. Further, it resolves to expand capex rapidly than expenditure of revenue levels. It will help in reducing the fiscal deficit in the economy at a moderate rate. However, the reduction in fiscal deficit continues to be higher than the target set by FRBM. This will aid in public investments leading to growth in the medium term.

Factors helping reduction in fiscal deficit
Following the financial year 2021-2022, the capital expenditure has played a crucial role in improving the GDP of the country. The factors such as growth in tax collections on personal incomes, big dividends of RBI, and expansion of GST revenue will aid in contracting the fiscal deficit.

There is a crucial requirement of fiscal consolidation in order to achieve lower debt levels and its costs, and also leading to expenditure in productive areas.

Need for high capex
India has a long term goal of becoming a developed nation in the year 2047. To achieve this, it aims to develop its infrastructures in terms of railways, highways, clean energy aims for creating an energy generation capacity of 500 GWs in the year 2030, and a strong agricultural sector in terms of better climate risk management and storage facilities. With the help of the PLI scheme, it focuses on expansion of local manufacturing activities in key sectors in the country. These are the reasons that the outline of the budget plan continues to be the same for years.

Economic Performance
India recorded a moderate growth in GDP to about 6.4 percent. The reason for this is due to contraction in capital formation and public spending did not fulfil the target of 17 percent. Also, the investment share in the growth of GDP fell to about 2 percent in the current financial year compared to the previous financial year growth of about 4 percent. In the upcoming budget, it will concentrate on keeping the capital spending in the range of about 3 to 3.4 percent of the total GDP. It will be considered as the highest in the period of the previous 20 years.

The expansion of capex levels will aid in promoting private sector investments as well investments at state level. It will also encourage growth in the medium term and also maintain growth levels close to 6.5 percent in the upcoming periods.

Growth drivers
Compared to private consumption, investment plays an important role in expansion of growth in the long term. In present times, there are a lot of worries regarding contraction in private consumption due to low consumption levels in urban areas. However, it is projected to grow in the second half of the financial year 2025. There is also a need for tax reduction in personal income but it’s not possible due to slowdown growth of corporate tax, considering moderate manufacturing activity.

In present times, the tax-to-GDP ratio accounts to 11.6 percent compared to the 1.5 percent ratio during the before pandemic period due rise in GST collections. In order to expand GST collection, there is a need to ease the GST rates and also increase the average GST. Apart from this, it needs to bring products such as petroleum under the GST base.

Focus on import duties
Currently, India’s import duties are higher compared to other manufacturing countries like Vietnam and China in Asia. It has increased to about 17 percent in the year 2023 compared to 13.37 percent in the year 2015. The reason for high tariffs was to protect India from China’s dumping strategy and also to promote domestic manufacturing in key sectors such as electronics. However, the high level of tariffs are becoming harmful for India in terms of acting as a replacement for China in trade and also to adopt global supply chains. It also affects domestic production due to high tariffs on inputs. In present times, Trump is planning to impose duties on China. This could be a chance for India to shine but it will be affected due to high tariff levels. It needs to lower tariff levels to make the Indian manufacturing sector strong.

Government borrowings
It helps in covering fiscal deficit as well as affect the resources of the private sector. In the upcoming financial year, the government is anticipated to have expenditure of about 14.5 percent compared to current projection of 14.8 percent. While the spending on segments such as pension, salaries, subsidies, and interest payment will be about 11.3 percent. The capex is anticipated to be about 3.2 percent.

In terms of revenue collections considering both tax and non-tax revenue and deducting states’ shares, it will be about 10 percent. Further, the fiscal deficit is anticipated to account for 4.5 percent in the upcoming year compared to 4.9 percent in the current financial year.

The government aims to have gross borrowing of about 14 trillion and net borrowing of about 11.4 trillion. It is similar to the borrowing in the previous year indicating almost no change in the borrowing levels. It will only help in slight lowering of debt-to-GDP ratio. There is a need for reduction in debts and rapid economic growth.

In order to achieve rapid fiscal consolidation, the government is required to contract the budget base as per the previous pandemic levels but it will adversely affect capex. This is the reason why it needs to maintain the high capex. It can be supported by stable growth in revenue levels and also remaining unused capex funds can be used to maintain the strength of government investment. It will also help to protect from global uncertainties in the economy.

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Budget needs to focus on local infrastructure

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Interest Payment Burden to reduce in FY26
Equities, Markets - January 27, 2025

Budget needs to focus on local infrastructure

Budget needs to focus on local infrastructure

Overview
With some workers returning to agriculture, the post-pandemic job market structure exhibits retrogression. The increase of labor earnings has been hampered by this trend. According to research, the multiplier from public investments in local infrastructure passes through MSMEs and contributes to a favorable work environment. The budget should prioritize that.

The release of this year’s Union Budget coincides with a number of concerning structural change and employment data. Following the Covid-19 pandemic, overall economic growth recovered rapidly; however, current growth figures suggest that this impetus is waning. It is too soon to tell if the slowdown in GDP growth predicted for FY25 would be a one-time event or a long-term decline in growth. In any event, it is evident that concerted policy action is required on the employment front.

Increase in labour force in agriculture post pandemic
According to recent data from KLEMS and periodic labour force survey (PLFS), the pandemic caused a structural regression in the Indian economy, which has not yet been reversed as of 2023–2024.

An increase in the percentage of jobs in agriculture and self-employment is what is meant by structural retrogression in the Indian economy. Such a shift in employment from other sectors of the economy to more stable industries like agriculture was anticipated during the pandemic. As of 2023–2024, there were more workers in agriculture than at any other point since the early 2000s, indicating that employment in this industry has continued to rise after the epidemic. After the pandemic, labor productivity in the agricultural sector stalled as a result of the value created there not increasing proportionately.

In addition to agriculture, we anticipate that if more conventional wage or salaried employment opportunities are established, the percentage of self-employed workers—especially own-account and unpaid family workers—will decline with economic growth. However, from roughly 52% of the workforce prior to the epidemic to 58% in 2023–2024, the percentage of self-employed workers has grown. The growth has persisted after the pandemic, which is concerning.

Stagnation in earnings of major corporates and businesses
The fact that other industries where household businesses are commonly found, like food, beverages, and tobacco, textiles, leather and footwear, trade, and domestic services, were also less productive in real terms as of 2022–2023 than they were in 2017–18 suggests that the phenomenon of crowding into the self-employment sector appears to be more widespread than just agriculture. In other words, employment has increased more quickly than output in each of these sectors, most likely as a result of workers moving in from other parts of the economy where there is less need for labor.

This has the effect of completely stagnating or even decreasing real earnings overall. The PLFS provides quarterly data on earnings from regular salaried labor, self-employment, and casual wage work; the most recent data covers the April–June 2024 quarter. Earnings from regular salaried work have increased by an average of 5.3% annually in nominal terms or 0% annually in real terms since 2017–18 (the first year for which PLFS data are available). Earnings from regular wage jobs actually decreased by 0.14 percent annually over the April-June 2022 and April-June 2024 quarters.

Positive outlook
The fact that conventional pay employment increased by 11% in 2023–2024—its largest one-year growth in recent memory—surpassed the 8.6% increase in predicted self-employment. To ensure that the proportion of regular wage workers in the economy grows consistently, every effort must be made to ensure that this process continues.

MSMEs are a way of creating newer jobs
The bigger puzzle is why, in spite of a robust recovery in overall GDP growth, regular wage employment has not grown more quickly. Additionally, we should remember that the majority of job creation, even for paying positions, occurs in unlisted businesses and informal enterprises (more generally, MSMEs) rather than huge corporate firms. To allow businesses to grow, save, and invest, a new push for policy is required.

Barriers that hinder the growth at the bottom end for corporates
The absence of physical infrastructure is still a major barrier, aside from aggregate demand, which is a macro limitation that affects all businesses. Roads, energy, and water—the so-called bijli, sadak, and pani—are cited by businesses as the biggest barriers to growth, according to a 2019 IDFC Institute poll of 2500 small businesses nationwide. The government is well renowned for emphasizing the improvement of physical infrastructure. This agenda needs to be pushed further by shifting its focus to local infrastructure and small communities. India has made good progress in building highways, airports, and other major infrastructure, but we still lag far behind in terms of the quantity and quality of local roads, water, power, and other essential services.

Conclusion
In a big and diverse economy like India, the impact of a single budget—and that of only the Union government—is minimal, but the budget’s goals do give an idea of how the Union government is currently considering the economy. If the budget strongly favors removing barriers to small business growth in small towns, that would be encouraging. In order to guarantee inclusive development and long-term economic growth, India must produce the requisite number of jobs.

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Impact of Trump 2.0 on Indian Equity Market

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Equities, Markets - January 23, 2025

Stimulate Economic growth by tax relief, deregulation, and expansion of capex

Stimulate Economic growth by tax relief, deregulation, and expansion of capex

Overview
Chairman and managing partner of EY India, Rajiv Memani stated that to boost economic growth in India, the government of India has to focus on factors such as deregulation of firms, tax relief to population on their personal income, expansion of capital spending, and also improvement in the business-friendly environment in India.

He further states that if the government of India implements these factors, and also raises funds from capital markets or disinvestments, it will help to observe if these factors can be implemented at faster speed to boost economic growth in the country.

Reason for weak economic growth
In recent times, the economic growth has weakened. The reasons for this are seasonal variations in several industries, and uncertainty among investors due to general elections. Apart from this, it is due to a number of geopolitical tensions in the world leading to an impact on pricing of international products. This has ultimately resulted in affecting the growth of GDP in India.

Steps to be taken for boosting economic growth
During the past few quarters, growth of India’s GDP has faced a slumping trend. The country’s annual growth is expected to grow by about 6.4 percent. Also, the budget 2025 is anticipated to have some capital spending plans which will help to boost the investment cycle in the economy and in turn stimulate economic growth of India.

In the previous six months, the lower consumption levels have resulted in slowdown in economic growth. He further states that tax relief in personal income will help stimulate consumption levels in the market. It will give relaxation to economic classes such as the middle-income and lower income population living in urban areas and also to the population living in rural areas. However, the government of India needs to make sure that it fulfills its promise of sustaining fiscal deficit at low levels, while implementing tax relief.

Adoption of ease of doing business and deregulation in the economy will also aid India’s GDP growth. Memani supported this idea with the plans of Trump 2.0 to lower the intervention of the federal government. He also believes that this will become a pattern followed by many countries in the world. He thinks that countries around the globe will take actions to make business easier to operate in the country. In present times, there are many regulations and requirements of approval to operate or start a business. Also, the process of finalisation of capital expenditure plans is also slow. If measures are taken to reduce this, it will help in boosting the economic growth in the country.

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Impact of Trump 2.0 on Indian Equity Market

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 Road to Progress: Union Budget 2025 to Accelerate India's Infrastructure Growth
Business, Equities, Markets - January 16, 2025

Road to Progress: Union Budget 2025 to Accelerate India's Infrastructure Growth

Road to Progress: Union Budget 2025 to Accelerate India’s Infrastructure Growth

India’s road infrastructure continues to be a cornerstone of its economic development, with the network expanding 59% over the past five years to over 6.7 million kilometers, making it the second-largest globally after the United States. As the Union Budget 2025 approaches, expectations are high for a substantial increase in road sector allocations, a move consistent with the National Democratic Alliance (NDA) government’s emphasis on infrastructure development.

Increased Budgetary Focus Expected
Over the past two years, road sector allocations saw tepid growth due to heightened social spending in the lead-up to the general elections. However, analysts anticipate a year-on-year budgetary increase of 8-10% for FY2026, as the government seeks to revitalize road execution. This allocation is expected to focus on expanding the national highway network while encouraging private sector participation, particularly through the Build-Operate-Transfer (BOT) model.

Addressing NHAI’s Debt Constraints
The National Highways Authority of India (NHAI), tasked with spearheading highway development, faces significant debt constraints. Its outstanding debt has surged to ₹3.2 lakh crore as of August 2024 from ₹1.8 lakh crore in FY2019, limiting its ability to borrow further. Consequently, the Budget is likely to maintain a zero-borrowing strategy for NHAI, shifting the focus to private investment and innovative funding mechanisms.

Reviving Private Sector Participation
The government has introduced several measures to stimulate private sector interest in road projects. These include:

Revised Model Concession Agreement: Enhanced terms for toll projects to attract developers.
Mandatory BOT Mode: Projects above ₹500 crore to be awarded under the BOT framework.
Streamlined Dispute Resolution: Faster resolution mechanisms to reduce project delays.
These amendments are expected to boost the share of BOT toll projects in the road infrastructure mix, offering a lower-capex alternative to the Hybrid Annuity Model (HAM) and fostering confidence among private players.

Challenges to Execution
Despite favorable policies, sluggish execution and low tendering activity remain concerns. By November FY2024-25, only 55% of the allocated funds had been utilized, signaling inefficiencies that must be addressed to ensure timely project delivery. Additionally, delays and cost overruns in the ambitious Bharatmala Pariyojana continue to draw criticism.

Rural Connectivity: A Key Priority
Rural road development is likely to gain prominence in this year’s Budget, as improved connectivity can significantly impact rural economies. However, successful implementation will depend on effective project structuring, attractive returns for developers, and streamlined clearances for long-gestation projects.

Accelerating Asset Monetization
Innovative financing models such as Toll-Operate-Transfer (TOT) and Infrastructure Investment Trusts (InvITs) need to be accelerated to unlock capital for new projects. These measures can help mitigate funding constraints and support the timely completion of critical infrastructure targets.

Economic Multiplier Effect
The road sector continues to command the largest allocation among infrastructure segments, given its significant multiplier effect on economic growth. Projections indicate a 9.5% compounded annual growth rate (CAGR) in road infrastructure from FY2025 to FY2032, driven by urbanization and rising demand for efficient transportation.

Conclusion
The Union Budget 2025 is poised to reinforce India’s road infrastructure growth trajectory, with a balanced approach that combines government funding and private sector participation. While challenges such as fiscal constraints, project delays, and execution inefficiencies persist, a strategic focus on policy enhancements and asset monetization can ensure sustainable development. For investors, the sector offers attractive opportunities, underpinned by robust growth prospects and government commitment to long-term infrastructure expansion.

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Strong Consumer Sentiment Boosts Automobile Dispatches by 12% in 2024

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India's Infrastructure Sector Calls for Policy Reforms to Boost Growth and Sustainability
Banking, Business, Equities, Markets - January 16, 2025

Infrastructure Expectation in Budget 2025-26

Infrastructure Expectation in Budget 2025-26

Overview and Current Scenario
India’s economic development in FY25 was hindered by limited public capital expenditure (capex), which was mostly caused by limitations associated with the election. Project execution was hampered by the Model Code of Conduct’s implementation during the state and parliamentary elections, especially in the first half of FY25, when total government capital expenditures fell 12.7% year over year.

In Q1 of FY25, the central government’s capital expenditures fell 35 percent year over year. In Q2, they recovered moderately, rising 10.3 percent year over year. Furthermore, state governments’ emphasis on populist welfare programs, which sparked discussions about fiscal discipline, also reduced the amount of money available for infrastructure projects. With just a few state elections scheduled for 2025, public capital expenditures are expected to pick up steam again, propelling advancements in areas like ports, roads, defense, and electricity.

Capex Trend
Infrastructure is still a priority even though capital spending (capex) has decreased by 12.3 percent year-to-date from April to November of FY25. Only 42% of the allocated capital expenditures had been used by November, down from 51% in FY24. This suggests a large backload of spending that is anticipated to occur in the second half of the fiscal year.

Q3 Results might lead to an increase in capex
Strong Q3 ordering activity points to a possible change in momentum as the fiscal year goes on. The government has made significant announcements about trains, defense, and power.
According to ICRA’s note, the significant projected shortfall in FY2025 (Rs 9.7 trillion) compared to the target (Rs 11.1 trillion) would allow for a 12–13 percent increase in FY2026 capital expenditures, or Rs 11 trillion, which would support growth in the upcoming fiscal year and crowd in private capital expenditures.

Sectoral Capex Increment in the Budget
In order to control inflation and the budgetary crisis, the government has been selectively prioritizing a small number of projects and sectors in order to reduce expenditure. Despite the bunching of a few orders in the remaining months of the current fiscal year, the government might still fall short of its initial capital expenditure targets given the current run rate. There are already rising expectations that the government will increase its capital expenditure budget for the upcoming year.

The Union Budget 2025–26 is anticipated to address these gaps with increased capex. The focus will likely be on sectors with high economic multiplier effects and a proven capacity for timely project execution, more so in the light of supporting economic growth. India’s GDP growth slowed to an estimated 6.4 percent in FY25, the weakest in four years, due to global headwinds and subdued private investment.

But in FY26, GDP growth is expected to rebound to 6.5–6.8 percent. For example, FICCI has suggested a 15% increase in capital expenditures for FY26 in order to sustain economic momentum, with a focus on investments in productive infrastructure that create long-term growth and jobs. It is anticipated that significant financial investment will be made in the fields of highways, railroads, defense, and renewable energy, just as in the past. Additionally, in anticipation the federal government will keep pushing states to undertake important infrastructure projects by allocating funds.

Ernst & Young Report on Infrastructure Sector Expectation from the Budget
According to EY, the shortfall will need to be made up in FY26 because the capital expenditure was significantly lower in FY24 due to the election. India’s goal of becoming a $7 trillion economy by 2030 is predicted to require $2.2 trillion in infrastructure investment, underscoring the necessity of enacting strong fiscal policies. Spending on infrastructure also frequently has a multiplier effect, with each rupee spent having a threefold effect on GDP. Public-private partnerships (PPP) in major projects involving ports, airports, roads, etc., require a renewed focus and innovative policy. This can be achieved through enhanced measures for viability gap funding (or “VGF”) and supportive policies and regulations.

Tax measures to boost infrastructure
Some of the tax measures to be implemented to support infrastructure include establishing a framework for fiscal consolidation for intragroup Special Purpose Vehicles (SPVs) that permits the offset of losses from one SPV against gains from other SPVs; reduced tax rates under a special and simplified tax regime for green energy and infrastructure projects; encourage business involvement in large-scale space initiatives through tax breaks; introducing a favorable tax framework for carbon credits; offshore wind projects were the focus of the VGF, but this would not be feasible without the importation of foreign cash, technology, and expertise. It would be beneficial to simplify the tax code for these kinds of initiatives.

Conclusion
It is highly anticipated that Budget 2025 would introduce a number of programs to accelerate the development of infrastructure. Private participants would be encouraged to plan their involvement if ambitious asset monetization programs received additional advice.

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Business, Equities, Market News, Markets - January 7, 2025

India’s Economy: Resilient Amid Global Uncertainties and Poised to Lead Emerging Markets in 2025

India’s Economy: Resilient Amid Global Uncertainties and Poised to Lead Emerging Markets in 2025

In recent years, despite economic and global insecurities and turbulence, India’s economy has consistently been standing its ground on resilience and development. In recent times, two reliable reports have been staged to bolster this connotation, one published by Goldman Sachs and the other by Morgan Stanley.

Goldman Sachs Report
A new Goldman Sachs report published on 10th December 2024, forecasts the reaffirmation of India’s economy to remain firm. This report comes despite of numerous uncertainties owing to India’s solid macroeconomic fundamentals and strategic reforms. This positive posture has been reflected by various financial institutions thus positioning India as a strong leader among the emerging markets in 2025. At the core of this stability, India has been able to achieve sound macroeconomic management. The Reserve Bank of India has managed fairly well in terms of controlling inflation while ensuring overall financial stability. Governor Shaktikanta Das, in this way, noted that India is, in his opinion, “well positioned” to cope with external shocks due to the country’s policies, decent levels of foreign exchange reserves, and external debt.
Economists at Goldman Sachs predicted that India’s GDP would increase by an average of 6.5% between 2025 and 2030. Their 6.3% projection for 2025 is 40 basis points lower than the consensus of analysts polled by Bloomberg. The slowing growth rate is due, in part, to diminishing public capital expenditure growth. According to budget predictions, the Indian federal government’s capex growth fell from a CAGR of 30% per year between 2021 and 2024 to mid-single digits in nominal terms in 2025.
Credit is slowing

Credit is also shrinking. Total private sector loan growth in India peaked in the first quarter of the 2024 calendar year and has slowed in the past two quarters. The slowdown was primarily caused by a decline in bank credit growth to roughly 12.8% as of October, down from more than 16% in the first quarter of this year. In particular, household credit growth in unsecured personal loans slowed after the Reserve Bank of India tightened retail loan standards in November 2023.
Inflation Factor

Headline inflation in India is predicted to average 4.2% year on year in 2025, with food inflation at 4.6%, significantly lower than our analysts’ prediction of 7%-plus for 2024, thanks to ample rainfall and robust summer crop sowing. Food supply shocks caused by weather-related interruptions remain the most significant risk to this prediction. So far, excessive and erratic food inflation, primarily driven by vegetable prices due to weather shocks, has prevented the RBI from relaxing monetary policy. Core inflation should be around the RBI’s objective of 4% year on year in 2025, with the likelihood of inflation falling if US tariffs force Chinese firms to reallocate products to regional markets. The RBI has managed fairly well in terms of controlling inflation while ensuring overall financial stability. Governor Shaktikanta Das, in this way, noted that India is, in his opinion, “well positioned” to cope with external shocks due country’s policies, decent levels of foreign exchange reserves, and external debt.

Market Outlook
A separate analysis from Goldman Sachs Research predicts that India’s equities would perform substantially in the medium future. In the short term, however, sluggish economic growth, high beginning values, and negative earnings-per-share revisions may keep markets rangebound. Goldman Sachs equity experts believe the benchmark NIFTY index will reach 27,000 by the end of 2025. They also predict MSCI India earnings to expand by 12% and 13% in 2024 and 2025, respectively, falling short of consensus expectations of 13% and 16%. The MSCI India index of companies is trading at a 23x forward P/E multiple, which is much higher than the 10-year average and higher than our strategists’ top-down fair value estimate of 21x, implying more de-rating risk.

Further, the report remains neutral on Indian stocks in the short term, but sees potential in local sectors such as automobiles, telcos, insurance, real estate, and e-commerce, which may have a better path to higher profitability.

Morgan Stanley Report
According to Morgan Stanley’s India Equity Strategy Playbook, India will be among the top emerging markets by 2025. As a result, the BSE Sensex is expected to reach 93,000 by December 2025, a growth of around 18%. The researchers deem India’s value multiple high because over the next four to five years India is expected to record profits growth at an average rate of 18-20% on a yearly basis coupled with macroeconomic stability and a large pool of domestic risk capital. A gradual increase in the level of protection against global market volatility is verified by the fall in the correlation between the returns on India’s equities and the world’s stock markets.

Market Sentiment
Factors that determine the sentiment such as Morgan Stanley’s in-house sentiment index portray a neutral to buy market, which coincides with the bullish perspective of the team. Domestic mutual fund sources remain robust, especially SIPs, although other sources not belonging in that category are slowing down. On the other hand, foreign equity portfolio inflow is favorable, while outflow in debt portfolio is unfavorable. Sensex earnings are predicted to expand at an annualized rate of 17% through FY27, with corporate profits as a percentage of GDP on the rise. Profitability measurements like return on equity (ROE) show a positive cycle. Corporate debt is expected to reach 58% of GDP by 2025, with a positive nominal growth outlook notwithstanding market expectations for low growth.

US- India Relations
The gap between real GDP growth and the 10-year bond yield points to a positive prognosis for stocks. Indicators such as the policy certainty index, which has declined from pre-election levels, and the favorable real policy rate gap with the United States also help equities performance. Short-term interest rate and yield curve trends suggest that equities returns may moderate in the next 24 months, while earnings growth in the high teens is predicted during the next year. Global investors are likely to find relative safety in India’s financial markets as a result of Donald Trump’s economic plans, especially any protectionist trade policies that may cause emerging market turbulence. However, investors and analysts believe that India’s strong economic growth, minimal exposure to the Chinese and US consumer markets, healthy local appetite for equities, and a central bank committed to currency stability will boost the country’s appeal in the face of global uncertainty.

Conclusion
Thus according to these reports, India’s share of the EM and global indices is increasing, and its performance relative to China is improving. Household savings are shifting towards shares and away from gold, indicating increased confidence in financial assets.

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Auto Sector Eyes 5% Growth in 2025

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Fiscal Discipline in Focus: Government Plans Deficit Reduction by FY26
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - September 20, 2024

Government Expands Capex, Keeps Deficit in Check

Government Expands Capex, Keeps Deficit in Check

As of July 24, 2024, the central government’s fiscal deficit has decreased to ₹1.41 lakh crore, down from ₹1.54 lakh crore in the same period last year. This positive trend reflects the government’s ongoing commitment to fiscal prudence and responsible economic management.

This reduction in fiscal deficit to two primary factors: a moderate growth in tax revenues and controlled government spending, according to a recent analysis by financial services firm Anand Rathi. The fiscal deficit for April-July 2024 was at ₹2.8 lakh crore, representing 17.2% of the annual target, indicating better budget control than the previous year. This marks a significant improvement from the previous year when the deficit had reached ₹6.1 lakh crore during the same period.

Interestingly, government expenditure during these initial months has been more restrained compared to the previous year. Capital expenditure, in particular, has seen a notable decrease of 17.6% year-on-year. This cautious approach to spending suggests that the government is carefully balancing its growth initiatives with fiscal responsibility.

Personal income tax collections have been a notable strength in the current financial environment, demonstrating resilience and outperforming expectations. As the deadline for annual tax returns approached in July 2024, these collections surged by an impressive 64% compared to the same month last year. This strong showing has resulted in personal income tax revenues reaching 33% of the budgeted target for the fiscal year 2024-25, indicating a healthy pace of collection.

The corporate tax situation is more nuanced and multifaceted compared to other areas of tax revenue. After briefly showing signs of recovery in June 2024, corporate tax collections have once again turned negative. This fluctuation is partly attributed to ongoing tax refunds, which have impacted the net collection figures. The volatility in corporate tax revenues highlights the challenges faced by businesses and the need for continued economic support and reforms.

On a more positive note, indirect tax collections have shown improvement, particularly in the realm of customs duties. Customs duty collections have significantly rose, posting a 29% increase compared to the same period last year. This increase could be indicative of recovering international trade volumes or changes in import patterns.

While divestment receipts have remained stagnant, suggesting potential challenges in the government’s asset monetization plans, there’s been a substantial boost in non-tax revenues. These have surged by 70% year-on-year, providing a welcome cushion to the government’s overall revenue position. This increase in non-tax revenues could be attributed to various factors such as dividends from public sector enterprises, fees, and other miscellaneous sources.

Government expenditure for the initial quarter of the fiscal year has reached 27% of the annual budget allocation, indicating a gradual recovery in spending patterns. This figure provides insight into the pace of government expenditure and its alignment with annual budgetary plans. July 2024 saw a mixed picture, with monthly revenue expenditure decreasing by 14% year-on-year, while capital expenditure rebounded strongly with a 108% year-on-year growth.

Despite this recent rebound in capital spending, it’s important to note that overall capital expenditure for the first four months of the fiscal year remains 18% lower than the previous year. This slower pace of capital spending can be partially attributed to the implementation of the model code of conduct during the first two months of the year, coinciding with the general elections. The subsequent recovery in spending after the elections has been limited, as the government awaited the full-year budget announcement.

The government expenditure is expected to accelerate in the coming months. This anticipated increase is likely to be triggered by the release of funds following the Parliament’s approval of the finance bill. As budgetary allocations are formalized and disbursed, we can expect to see a pickup in both developmental and welfare spending.

A significant boost to the government’s fiscal position has come from an unexpected quarter – the Reserve Bank of India (RBI). The government’s finances received a significant boost from the central bank’s unprecedented dividend payment, which amounted to ₹2.11 lakh crore. This windfall, combined with the strong performance of personal income tax collections, has created a more favorable fiscal environment. These positive developments may help offset potential shortfalls in other areas, particularly in divestment collections, which have yet to gain significant momentum this fiscal year.

The government’s ability to maintain this balance between fiscal prudence and necessary expenditure will be key to supporting India’s economic growth trajectory. Factors such as global economic conditions, domestic consumption patterns, and the pace of structural reforms will all play important roles in shaping the fiscal outcomes for the remainder of the year.

In conclusion, the latest fiscal data presents a picture of cautious optimism. While challenges remain, particularly in areas like corporate tax collections and divestment proceeds, the overall trend suggests that the government is making strides in its fiscal consolidation efforts. The coming months will be critical in determining whether this positive momentum can be sustained and translated into long-term economic benefits for the nation.

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India's Manufacturing Growth Slows in August, PMI Hits 3-Month Low at 57

India’s Manufacturing Growth Slows in August, PMI Hits 3-Month Low at 57

In August, companies reported weaker growth in output and new orders, which brought the expansion of India’s manufacturing sector to a three-month low. According to HSBC’s most recent data, which was made published on Monday, the Purchasing Managers’ Index (PMI) fell from 58.1 in July to 57.5 in August. Even if the sector’s growth is still good, this fall signals that it is losing some of its movement. Increase is indicated by an index number higher than 50.

Softer Growth in New Orders and Output: The August report makes clear that the rate of growth in new business and production for Indian manufacturers decreased. When compared to historical averages, the expansion rates are still substantial despite this slowdown. The poll indicates that while companies are still growing, the rate of growth has slowed. Some businesses have blamed the slower pace on intense competition, which has been linked to this in part. Regarding output, although production levels remained elevated, the growth rate decelerated to its lowest point since January of this year. While demand wasn’t as high as it had been in prior months, some businesses pointed out that technological investments and increased sales volumes helped maintain production levels.

Impact on the International Market and Reduced Demand: According to the poll, the two main measures of demand output and new orders reached their lowest points in seven months. While still healthy overall, international demand grew at its slowest rate since January. This implies that although the industry is still growing, it is not doing so as quickly as it formerly did on a national and worldwide level.

Focussing on the current situation, HSBC Chief India Economist Pranjul Bhandari noted that output and new order patterns closely followed the PMI’s overall trend. According to Bhandari, the industry is still performing well by historical standards, but several companies blamed the decline on intense competition.

Price inflation remains despite easing cost pressures: A moderating of cost pressures was one of the report’s good observations from August. The rate of inflation for input prices decreased to its lowest level in five months, enabling businesses to expand their purchasing. The rapid inflation of output prices faced by manufacturers persisted, almost matching the 11-year peak reached in July, even with the slower increase in expenses. This indicates that, mainly as a result of consistently high demand, businesses were still charging more to their customers even if it was cheaper for them to create the items.

Although there was an obvious decrease in input costs, Bhandari clarified that the inflation of output prices slowed down considerably less sharply. Because of this, producers were able to raise their profit margins by charging customers for extra expenses.

Effect on the RBI’s Interest Rate Outlook and Employment: According to the poll, employment growth in the manufacturing sector has slowed for the past two months. In spite of this, businesses kept adding new employees for the sixth consecutive month, propelled by high demand and hope for the future of their businesses. Nonetheless, when several businesses lowered their headcounts at the middle of the second fiscal quarter, the labour market appeared to be tightening.

The main cause of India’s July inflation rate drop, which was nearly five years below the previous record of 3.54%, was a substantial base impact.  Due to the decline in inflation, economists forecast that the Reserve Bank of India (RBI) would cut interest rates by 25 basis points in the upcoming quarter. A rate reduction is anticipated to contribute to economic stimulation and partially overcome the manufacturing sector decline.

Prospects for the Manufacturing Industry in the Long Run: Considering the difficulties encountered in August, the Indian manufacturing sector has grown for 38 months running since July 2021. The industry is still growing, but there are underlying issues that need to be resolved, as seen by the PMI’s drop from the flash estimate of 57.9 to 57.5.

Softer demand, increased competition, and rapid price inflation all point to the reality that manufacturers will face challenging conditions in the months to come. But with the possibility of an RBI rate decrease as well as ongoing investments in efficiency and technology, the industry might be able to maintain growth even in more difficult economic times.

In summary, the development trajectory of the Indian manufacturing sector has slowed, but it is still growing. The months ahead will be critical as businesses adapt to shifting market conditions and authorities think through ways to encourage sustained economic growth.

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Global Rate Cuts and its Implication’s on Indian Markets

Global Rate Cuts and its Implication’s on Indian Markets

The Indian stock markets are on the brink of significant gains as global central banks are expected to initiate a cycle of rate cuts. This optimistic outlook is driven by a convergence of favorable domestic and international factors, including robust economic growth, a stable political environment, and, most notably, the anticipated easing of monetary policy across major economies. As global financial markets brace for lower interest rates, India’s equity markets are likely to be among the key beneficiaries.

After years of strict monetary policies meant to contain inflation, central banks all over the world are indicating rate decreases, which is a significant change in the global economy. The main causes of this change in attitude among investors are the economy’s slowing growth, ongoing inflationary pressures, and geopolitical unpredictability.

Interest rate cuts are a tool used by central banks to encourage borrowing and investment. By lowering the cost of borrowing, central banks aim to stimulate economic activity, increase consumer spending, and ultimately drive economic growth. The expectation is that lower interest rates will lead to increased investment by businesses, more spending by consumers, and, consequently, higher demand for goods and services.

The transfer of capital across national boundaries is one of the most direct consequences of global rate reduction. Investors frequently look for better returns in developing markets when interest rates in established economies decrease, which increases capital inflows into nations like India. When foreign investors buy Indian bonds and stocks, asset values rise and stock markets benefit.

For emerging markets like India, lower global interest rates are a boon. Rising capital flows into developing countries are usually the consequence of rate reductions in developed economies, as investors seek greater profits.
India, with its strong economic fundamentals and attractive growth prospects, is well-positioned to attract a significant share of these inflows. This influx of foreign capital is expected to provide a substantial boost to Indian equity markets, driving up stock prices and enhancing market liquidity.

Investor sentiment in India has been increasingly bullish, driven by a confluence of factors. The consistent performance of Indian equities, particularly in sectors like technology, pharmaceuticals, and consumer goods, has instilled confidence among both domestic and international investors.
Many Indian companies have reported better-than-expected quarterly results, reflecting robust demand and effective cost management. This trend is expected to continue, especially in sectors that are poised to benefit from global rate cuts, such as real estate, infrastructure, and financial services.

While global rate cuts can provide short-term boosts to the Indian economy through increased capital inflows and stock market rallies, there are long-term implications to consider. For instance, excessive dependence on foreign capital can make the Indian economy vulnerable to external shocks. If global investors suddenly withdraw their investments due to changes in global monetary conditions, it could lead to a sharp correction in Indian markets, potentially destabilizing the economy.

While the outlook for Indian stock markets is largely positive, investors should remain cautious of potential risks and challenges. Global economic conditions, while improving, remain fragile. Any unexpected developments, such as a sudden escalation in geopolitical tensions or a resurgence of inflationary pressures, could disrupt financial markets and dampen investor confidence.
While global rate cuts are expected to benefit Indian markets, they could also lead to increased volatility. Rapid inflows of foreign capital, while beneficial in the short term, could create asset bubbles if not managed carefully.

In conclusion, Rate reductions throughout the world have mixed effects on the Indian economy. They can have short-term advantages like capital inflows, stock market gains, and the possibility of domestic rate reduction, but they can also have drawbacks like instability in the currency, inflationary pressures, and susceptibility to outside shocks. India has to be cautious about the dangers and maintain a balanced approach in order to take advantage of the possibilities presented by the global rate decreases. To guarantee sustained economic growth, India’s authorities must continue to be proactive in regulating these dynamics as the world’s monetary circumstances change.

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RBI Charts Course for Sustainable Growth: Inflation Control as the Key

RBI Charts Course for Sustainable Growth: Inflation Control as the Key

Introduction:

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) conducted its review on December 2023-2024, assessing both global and domestic economic conditions. The committee made decisions pertaining to key interest rates and provided insights into the outlook for the economy.

KEY DECISIONS:

In response to the prevailing and evolving macroeconomic conditions, the Monetary Policy Committee (MPC) convened on December 8, 2023, and arrived at several key decisions. The committee opted to maintain the policy repo rate at 6.50 percent within the liquidity adjustment facility (LAF). Additionally, the standing deposit facility (SDF) rate was held steady at 6.25 percent, while both the marginal standing facility (MSF) rate and the Bank Rate remained unchanged at 6.75 percent.

The MPC’s strategic focus is on gradually eliminating accommodation to ensure that inflation steadily approaches the set target. At the same time, the committee intends to offer the essential assistance for economic growth. These actions are consistent with the broader goal of meeting the medium-term target for Consumer Price Index (CPI) inflation, which is set at 4% within a +/-2% band, and thereby contributing to the development of sustainable growth.

GLOBAL ECONOMIC LANDSCAPE:

1. Global Growth: The committee acknowledged a varied deceleration in global growth among economies.
2. Inflation: Global inflation showed a downward trend but remained above target levels, with persistent underlying inflationary pressures.
3. Market Sentiments: Positive developments were noted since the previous MPC meeting, marked by declining sovereign bond yields, US dollar depreciation, and strengthened global equity markets. However, emerging market economies faced ongoing challenges with volatile capital flows.

DOMESTIC ECONOMIC OVERVIEW:

1. Economic Resilience: The domestic economy demonstrated resilience, evidenced by a robust 7.6 percent year-on-year growth in real GDP in Q2:2023-24. This growth was supported by strong investment and government consumption, mitigating the impact of net external demand.
2. Prospects for Consumption and Investment: Continued strength in manufacturing, buoyant construction, and a gradual rural sector recovery are anticipated to brighten household consumption prospects. Healthy balance sheets of banks and corporates, normalized supply chains, and rising public and private capital expenditure are expected to bolster future investments.
3. GDP Growth Projection: Taking into account various factors, the MPC projected real GDP growth for 2023-24 at 7.0 percent, with Q3 at 6.5 percent and Q4 at 6.0 percent. Projections for Q1:2024-25 are 6.7 percent, Q2 at 6.5 percent, and Q3 at 6.4 percent, with risks evenly balanced.

INFLATION OUTLOOK:

1. CPI Inflation: Headline inflation fell to 4.9 percent in October 2023 due to corrections in vegetable prices, fuel deflation, and broad-based moderation in core inflation. Risks include uncertainties in food prices, base effects, and volatile crude oil prices.
2. Inflation Projection: CPI inflation is projected at 5.4 percent for 2023-24, with Q3 at 5.6 percent and Q4 at 5.2 percent. Q1:2024-25 is expected at 5.2 percent, Q2 at 4.0 percent, and Q3 at 4.7 percent, with risks evenly balanced.

MPC DECISIONS AND RESOLUTIONS:

1. Policy Rates: The MPC unanimously voted to keep the policy repo rate unchanged at 6.50 percent.
2. Focus on Inflation Alignment: The majority of the MPC expressed commitment to withdrawing accommodation to align inflation progressively to the target while supporting growth. One member, Prof. Jayanth R. Varma, expressed reservations on this aspect.

FORWARD GUIDANCE:

The MPC emphasized the need for sustained disinflation, monitoring food price pressures, and remaining vigilant to potential challenges in crude oil prices and financial markets. The current policy stance is actively disinflationary, with preparedness for timely policy actions if warranted.

CONCLUSION:

In conclusion, the RBI’s Monetary Policy Review for December 23-24 reflects a cautious approach, balancing the need for inflation control with support for economic growth amidst a dynamic global and domestic environment.

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