Budget 2023: What to Expect from Modi Government's Last Budget?

According to a foreign brokerage, the next budget, which will be the last complete budget of the current government before the general elections in mid-2024, would be more rural and infrastructure-focused.

Given that the country will go to the polls in mid-2024, the upcoming budget is projected to increase rural/agri investment by USD 10 billion – a 15% increase over FY23 – while maintaining double-digit 20% growth in public capex, according to UBS India economist Tanvee Gupta Jain in a note on Wednesday.

However, Gupta claimed that the government is unlikely to go beyond fiscal boundaries with its election-oriented budget, and she also expects the subsidy burden to ease significantly in FY24, creating more fiscal space to reallocate money to existing rural schemes such as MGNREGA, rural housing, and roads, among others.

She also predicts the economy to decline further, with GDP growth of only 5.5% for the next fiscal year, far lower than the consensus of 6%, citing slowing global growth and the delayed effects of monetary tightening, as well as the spillover effect of an expected worldwide recession this year.

UBS India economist added that the country's structural development narrative remained intact and that she expects the domestic economy to be able to sustain potential growth of 5.75-6.25 percent in the medium term, as she sees the government continuing its focus on capex, manufacturing, and digitalization.

On the rupee, she predicted that depreciation pressures would subside before the local currency plummeted to 85 per US dollar in the first half of the year, before recovering, and that the rupee would continue to lag its emerging market peers. This will also have an effect on bond prices, which may peak at 7.5% mid-year and then fall to 7% by the conclusion of the next fiscal year.

The Swiss brokerage likewise has a flat view of the markets, predicting zero gains in the Nifty due to the already high valuation.

"Receding household flows and high valuations may weigh on the market, and we estimate Nifty to provide a CAGR (Compounded Annual Growth Rate) of roughly 10.5% over the next three years, compared to 11% over the previous five years," the research stated.

The brokerage believes that values will impact the market's direction more than profits over the coming 12 months.

With pandemic-related surplus savings unwinding and local bank deposit rates rising, household flows to market are displaying early but clear signs of fatigue, according to the brokerage, and values are projected to normalize as household flows recede.

Its 12-month Nifty target is 18,000 (a 0% rise from current levels), with a target PE of 7% over the long-term average.