A Budget That Prioritizes Growth

Nimesh Shah, MD & CEO - ICICI Prudential AMC

With the government attempting to achieve a balance between fiscal priorities, minimum populist initiatives, and capex drive, the FY24 budget has been in line with expectations. Prior to the budget, we were seeking for a growth-oriented expenditure that could support maintaining the growth momentum, which this budget has succeeded in doing. The government's macroeconomic policies have been excellent thus far. The fact that India had lower inflation in 2022 than even the USA and as a result was in a strong macroeconomic position is proof of this. Further strengthening India's macroeconomic position is the decline in crude oil prices and the near-peaking of the global interest rate cycle. The actions implemented in tax administration that have boosted direct tax revenue and GST collection are yet another significant advantage. This has been extremely beneficial to the economy and improved income collection. India continues to be one of the most structural markets in the world as a result of all these initiatives. As a result, India offers a secular growth story that is unique among emerging and developed economies to international investors.

So far, the government's actions have supported growth momentum while concentrating on reducing the fiscal deficit. Giving help to the middle classes at the same time is probably going to result in a continuation of the growth in a positive way. The Indian equity markets have underperformed the other markets in recent months. If Indian equities continue to underperform for a few more months, they will be valuation wise well-positioned for the long term and offer a promising long-term investment opportunity. As a fund house, during the course of this year we have been advising investors to invest systematically in equities, follow asset allocation plans, and invest in debt mutual funds. The government has taken a number of actions over the last three years that have helped level the playing field for debt investments. Due to this, investing in debt mutual funds over the long term has become quite alluring.

Given that equity markets are not cheap, it may be preferable for an investor considering a lump sum investment to choose offers from the asset allocation-oriented or hybrid category, such as the multi-asset or balanced advantage category. We believe macro investing will be vital over the next ten years, making products like business cycle funds essential. On a valuation perspective, large caps are better positioned in terms of market capitalization than midcaps, and midcaps are better positioned than small-caps. The potential volatility in these areas can be taken advantage of by investing in aggressive categories like mid cap, flexi cap, value, special situation, or small cap if one is using a systematic investment plan (SIP) and has a 3-5-year investment horizon.

Currently, the 1-2-year portion of the curve, which is the shorter end, looks fairly priced. The RBI is now content with inflation hovering around 6% unlike previously when RBI’s monetary policy actions were focused on 4% inflation. With an additional 25 bps rate hike, at a repo rate of 6.5 per cent and average inflation of 6 per cent, we don't believe that rates are restrictive enough to cause an economic slowdown. In fact, the economy will continue to expand with overall monetary policy being supportive of growth. 

In light of that, we believe the RBI will not reduce rates any time soon and so adding duration through the long end of the curve may not be fruitful. Given this scenario, we prefer investments with a shorter duration as there is no additional yield available on the longer-duration assets. The other category an investor may consider is the dynamic bond fund category. A savvy investor may consider adding credit to the portfolio in a staggered manner.

In conclusion, the budget is pragmatist and growth-oriented, helping India maintain its position as one of the world's fastest-growing economies.