As the Indian economy continues its journey towards recovery, the Union Budget 2023 has been a much-anticipated event for investors and analysts alike. In this article, we will take a closer look at the impact of the budget on investors. Investors Benefit when Investments look attractive at current prices, based on changes in prospects or outlook. There is a lot of money chasing investments. Let’s answer two questions that any investor would ask a SEBI Registered Investment Advisor or a Portfolio Manager:
- Will the Budget Help Increase Money into the Markets? This is a question on many investors’ minds. The answer is that the budget may play a role, but it will also depend on other factors such as interest rates, economic growth, and market sentiment.
- Do Stocks Look More Attractive to Merit More Buying? It is important to do your own research and assess whether stocks look more attractive based on your investment goals and risk tolerance. The Union budget 2023 can provide a positive backdrop, but it is not the only factor to consider.
We will consider these two questions in the rest of the article.
Comparing Union Budget with a Home Budget
Just like how a household budget is an important tool for managing finances, the Union Budget provides a blueprint for the government’s financial management and economic growth. Understanding the union budget 2023 can help investors make informed decisions.
|Personal Income Tax||15||Interest Payments||20|
|Corporate Tax||15||State’s Share of Taxes||18|
|GST||17||Central Sector Schemes||17|
|Excise Duty||7||Centrally Sponsored Schemes||9|
|Customs Duty||4||Finance Commission & Transfers||9|
|REVENUE RECEIPTS||64||Other Expenditure||8|
|Non Debt Capital Receipts||2||Subsidies||7|
Tax revenues constitute the major chunk of the government’s revenues, with low capital receipts meaning low dependence on disinvestments. Major revenue expenditures include interest (Rs. 20), defence (Rs. 8), subsidies (Rs. 7), and pension (Rs. 4). While largely unproductive from a financial perspective, efforts are underway to reduce expenditures.
Addressing Revenue Deficit
The government has a revenue deficit and needs to increase income and cut down on expenses. The government is taking up capital expenditure (Capex) as private investment is not coming in at the desired rate. Capex is 22.2% of total expenditure and a 33% increase since last year. Revenue expenditure is a crucial component of the government budget. It is the spending that occurs to sustain the normal functioning of government services and to provide the necessary support to citizens. The major revenue expenditure components include Interest, Defence, Subsidies, and Pension.
- Interest payments are the largest component, accounting for 20% of total revenue expenditure. This amount is spent on servicing the debt taken by the government to finance various projects and initiatives. With the increasing level of borrowing, the interest payment component is also likely to increase in the future.
- Defence spending, on the other hand, accounts for 8% of total revenue expenditure and is a necessary component of the government budget. Given the security threats facing the country, defence spending is unlikely to be reduced in the near future.
- Subsidies, which account for 7% of total revenue expenditure, are also an important component of the government budget. Although efforts are underway to cut down on subsidies, it is still an ongoing challenge for the government. The main challenge is to find a balance between providing support to the needy and reducing the fiscal burden.
- Pension payments, which account for 4% of total revenue expenditure, are also a major component of the government budget. Efforts are underway to reduce the pension payments, but it is a delicate balancing act between providing support to the elderly and reducing the fiscal burden.
The government is the largest borrower in the country, which means it will always have a bias towards lower interest rates. However, with increasing borrowing, the interest payment component is likely to increase in the future. This is why it is important for individuals to consider alternative sources of income, such as an annuity plan or the Senior Citizen Saving Scheme, while interest rates are still high. These options provide a regular source of income and help individuals manage their financial future.
Large Capex Investments
The government is taking up the mantle of investment and driving the growth of the Indian economy through Capex (Capital Expenditure). The private sector is not investing at the desired rate and hence the government is stepping up its efforts in this regard.
Revenue expenditure, which is the money spent by the government on day-to-day expenses, is pegged at a staggering Rs.35.02 lakh Cr and accounts for 77.78% of total expenditure, with a 1.2% increase. However, the government is focusing on reducing this number and maximizing Capex in a bid to grow the economy. The government has made huge investments in infrastructure such as railways, green hydrogen, and EV projects, among others. This investment is providing a much-needed boost to the economy and benefiting individuals and entrepreneurs alike.
However, there is a potential for inflation if the supply side is not boosted to keep pace with the increase in money flowing into the economy. To mitigate this, the government has undertaken several initiatives such as “Make in India,” “Production Linked Incentive, MSME support, and reducing Customs Duty on Equipment” to reduce the cost of manufacturing and incentivize private investment.
Incentives for Private Investments
To ensure that private investment picks up, the government has implemented several incentives such as “Make in India, Production Linked Incentive,” and “Support to MSMEs through presumptive taxation and timely payments.” Additionally, the reduced customs duty on equipment is aimed at reducing the cost of manufacturing and making the supply side more resilient against inflation. We can see that the government is taking the necessary steps to drive growth and investment in the Indian economy. It is now up to Indian entrepreneurs to make the most of the environment and take advantage of these initiatives to spur growth and development.
Understanding Budgetary Deficits
It is important to understand the different types of deficits, including the Fiscal Deficit (RD), Primary Deficit, and Effective Capital Expenditure (Eff-Capex). A high Fiscal Deficit means more borrowing or printing of money, leading to higher inflation and depreciation in the currency. The impact of the Covid-19 pandemic has resulted in a high FD, but the government remains committed to reducing it as a percentage of GDP.
The Importance of Reducing Fiscal Deficit (FD)
Fiscal deficit (FD) is the difference between a government’s total revenue and total expenditure. It represents the amount of government debt that is required to finance the government’s spending. A high fiscal deficit can lead to inflation and a depreciation in the currency, which can have a significant impact on the economy.
Inflation and Depreciation in Currency
A high fiscal deficit means that the government must borrow more money or print more money to cover its expenses. This leads to an increase in the money supply, which, in turn, leads to inflation. Inflation reduces the purchasing power of money, making it harder for people to buy the things they need. In addition, inflation can cause a depreciation in the value of the currency, making exports more expensive and imports cheaper. This can reduce the competitiveness of domestic goods in the global market and increase the dependence on imports.
Higher Interest Rates and More Debt Burden
In order to attract more investment, governments often raise interest rates. This makes borrowing more expensive for both the government and consumers. A high fiscal deficit also means that the government must repay more debt, which can increase the overall debt burden. This can result in reduced spending on essential services such as health, education, and infrastructure.
The Impact of Covid-19 on Fiscal Deficit
The Covid-19 pandemic has had a profound impact on the world economy. In India, the government broke the trend of reducing the fiscal deficit in order to tackle the pandemic. Despite a high fiscal deficit, the Indian Rupee remained relatively stable due to India’s growth story and foreign investors’ continued investment in the country.
Despite this stability, the government remains committed to reducing the fiscal deficit as a percentage of GDP. This is important to ensure that the country’s financial stability is not threatened in the future and that the government can continue to invest in essential services and infrastructure.
We can see an emphasis on reducing the fiscal deficit, which is crucial for the long-term stability of the economy. A high fiscal deficit can lead to inflation, depreciation of the currency, higher interest rates, and an increased debt burden. The government’s commitment to reducing the fiscal deficit as a percentage of GDP, despite the impact of COVID-19, is a positive step in the right direction.
Other Key Initiatives
The Union Budget 2023 has been unveiled, and it contains many initiatives aimed at boosting various sectors of the economy. In this blog post, we will take a closer look at the three main areas of focus in this budget – Agriculture, Technology, and Social Infrastructure.
Agriculture and Co-Operatives
Agriculture is the backbone of the Indian economy and accounts for a significant portion of the country’s GDP. Recognizing this, the government has included several initiatives in the union budget 2023 aimed at boosting the agriculture sector. These include the creation of an Agriculture Accelerator Fund, building digital public infrastructure, and increasing agricultural credit for animal husbandry and fisheries.
These initiatives will help increase rural income and contribute to GDP growth. The Agricultural Accelerator Fund will provide funding for farmers to adopt new technologies, improve productivity, and increase their income. The digital public infrastructure will help connect farmers with markets, making it easier for them to sell their produce. The increased credit for animal husbandry and fisheries will help these sectors grow and create more jobs.
The budget aims to leverage technology to fuel growth in the country. This includes a focus on AI and data privacy, the PM Kaushal Vikas Yojana, E-Courts, and Digi Locker. These initiatives will change the way business is done in India and bring technology to every corner of the country.
The PM Kaushal Vikas Yojana will provide skill training to the youth of the country, making them employable in the digital economy. E-Courts will improve the efficiency of the judicial system and make it easier for people to access justice. Digi Locker will provide a secure digital storage system for important documents, making it easier for people to access their records.
The budget also focuses on enhancing social infrastructure in the country, including through investments in health and education, a national digital library, and increased insurance coverage. These initiatives will improve the quality of life for people in India and contribute to the country’s growth.
Investments in health and education will provide better access to quality healthcare and education, improving the human development index of the country. The national digital library will provide access to information and knowledge to people in every corner of the country. Increased insurance coverage will provide financial security to people in case of illness or injury.
Specific Sectors that can benefit
- Automobiles and Auto Ancillary Industries due to scrapping of polluting vehicles
- EV industry
- Energy generation and transmission related businesses
- Industries supporting Agriculture and Allied Activities
- Export Oriented Businesses
- Infra, Cement, Steel
- Domestic IT industry, for various tech led initiatives
- Businesses supporting Tourism – Hotels, Travels, etc
- Manufacturing Industry that can benefit from PLI
The Union Budget for 2023 focuses on boosting agriculture, technology, and social infrastructure, and these initiatives are aimed at improving the quality of life for people in India and contributing to the country’s growth. The government’s focus on these areas will help create more jobs, increase income, and drive economic growth.
Direct Tax Benefits
The latest budget has brought about several changes in the tax regime, which will have a significant impact on the country’s economy and individuals. The budget has taken the step of shifting from the old tax regime to the new tax regime, which has the potential to free up money for consumption or fresh investments.
Those with a gross income of more than Rs 15.52,400 and who have committed tax-saving investments of more than Rs.3,75,000, have the option of continuing in the old regime. However, for those with a gross income less than Rs.15,52,400, it is recommended that they evaluate which regime works better for them.
One of the key changes in the tax regime is the decoupling of insurance and investment. Premiums in excess of 5 lakhs are now taxable, and term insurance has been excluded. This change will have a negative impact on the insurance industry but a positive impact on investment options such as mutual funds, direct equity, etc.
The budget has also brought several benefits for senior citizens and women. The extension of the Senior Citizen Saving Scheme (SCSS) will be beneficial for senior citizens, and the Mahila Sammaan offers 7.5% interest (1% higher) for 2 years compared to normal fixed deposits. This is a great opportunity for women to take advantage of the higher interest rate and secure their financial future.
In conclusion, reducing the fiscal deficit is crucial for the long-term stability of the economy. A high fiscal deficit can lead to inflation, depreciation of the currency, higher interest rates, and an increased debt burden. The government’s commitment to reducing the fiscal deficit as a percentage of GDP, despite the impact of COVID-19, is a positive step in the right direction.
The Union Budget 2023 focuses on boosting agriculture, technology, and social infrastructure, and these initiatives are aimed at improving the quality of life for people in India and contributing to the country’s growth. The government’s focus on these areas will help create more jobs, increase income, and drive economic growth. It is now up to Indian entrepreneurs to make the most of the environment and take advantage of these initiatives to spur growth and development. The budget has brought several changes in the tax regime that will have a significant impact on the economy and individuals. It is important for individuals to carefully evaluate the new changes and take advantage of the opportunities where possible to secure their financial future.
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