Union Budget 2024-25: Balancing Growth and Fiscal Prudence

India’s Union Budget 2024-25, announced on 23 July 2024, introduces significant changes aimed at balancing fiscal responsibility with growth initiatives, impacting both domestic and foreign investors.1

Key Tax Revisions

The budget revises capital gains tax rates, increasing the short-term capital gains tax on specified financial assets from 15% to 20% and the long-term capital gains tax to a consistent flat rate of 12.5%. These changes, effective immediately, may lead investors to shift toward long-term holdings and tax-efficient investments.

The Securities Transaction Tax (STT), a tax levied on the purchase and sale of securities listed on the Indian stock exchanges increases from 0.0625% to 0.1% on Options and from 0.0125% to 0.02% on Futures, effective from 1 October 2024. This could reduce trading volumes due to higher costs. The new tax regime on income from share buybacks, now taxed as dividends, might lead companies to prefer dividends over buybacks, influencing stock valuations and investment strategies.2

Fiscal Consolidation Commitment

Despite tax hikes, the budget emphasises fiscal consolidation, reducing the fiscal deficit target to 4.9% of GDP for FY25 and aiming for below 4.5% by FY26. This approach aims to maintain macroeconomic stability and reduce public debt, essential for attracting long-term investments and ensuring sustainable growth.3

The government retains a strong focus on capital expenditure, maintaining the capex target at 3.4% of GDP. Significant allocations to infrastructure projects, including railways and highways, are expected to stimulate demand in related sectors and boost economic activity. The budget also includes job creation and skill development schemes, supporting the manufacturing sector.4

Observations on Nifty Performance Post-Budget

Historically, the Nifty 50 Index has shown a positive trend following budget announcements after major elections. While past performance does not guarantee future results, the market often responds favourably due to clarity in economic policies, enhanced market stability, and growth-oriented initiatives.

Outlook and Key Considerations

As the market digests the budget, key points to monitor include5:

  1. Implementation of Capex Projects: Watch for updates on infrastructure projects, especially in railways and highways. Key metrics include project initiation dates, completion timelines, and budget allocations.
  2. Corporate Responses: Track earnings reports and corporate announcements on dividend policies and share buybacks. Sectors like technology, banking, and consumer goods may adjust capital allocation decisions, based on new tax regulations.
  3. Economic Indicators: Monitor GDP growth rates, employment figures, and inflation. For infrastructure spending, watch construction activity, industrial production, and infrastructure development indices to assess the budget’s effectiveness.

In summary, while the Union Budget 2024-25 introduces tax hikes that may initially unsettle the market, its commitment to fiscal consolidation and focus on infrastructure and job creation are expected to support sustainable economic growth, ultimately enhancing investor confidence and economic resilience.

Related Funds

NDIA: The Global X India Nifty 50 ETF (ASX: NDIA) invests in 50 of the largest companies listed in India.