Centre’s Fiscal Discipline Fuels Economic Stability, Drives Market Confidence

The Union Budget's substantial capital expenditure commitment and a lower-than-expected fiscal deficit have fostered confidence in economic stability and growth. Despite higher capital gains tax rates, market reactions remained stable, bolstered by political stability and significant increases in BRICS nations' gold reserves.

The Centre's decision to sustain its Capital Expenditure growth is expected to account for 23 per cent of total government spending and 3.4 per cent of the GDP, signaling a robust drive towards infrastructure development and economic expansion, according to the Jefferies Greed and Fear report. The Union Budget for the fiscal year 2024-25, presented this week, reflects a clear commitment to economic stability and growth through substantial capital expenditure investments.

A standout aspect of the budget is the central government fiscal deficit, projected at 4.9 per cent of GDP for this fiscal year, notably lower than the market expectations of 5.3 per cent. Jefferies' head of India research, Mahesh Nandurkar, suggested that the deficit could potentially drop below 4.5 per cent in the next fiscal year, benefiting both the bond market and the Indian currency.

The budget also saw an increase in capital gains tax rates, with short-term gains tax rising from 15 per cent to 20 per cent and long-term gains tax from 10 per cent to 12.5 per cent. Despite concerns about the impact on the asset management industry, market reactions have been stable, with minor fluctuations in companies like HDFC Asset Management.

Political stability emerged as another positive factor in the Jefferies report, with consensus in Delhi indicating that Prime Minister Narendra Modi is likely to maintain his coalition government intact for a full five-year term. This stability reinforces investor sentiment.

The report also noted significant increases in gold reserves among BRICS nations. Since the start of 2022, these countries have collectively increased their reserves by 428 tonnes, reaching a total of 5,687 tonnes by June 2024. Despite these increases, their reserves are still below those of the United States and the Eurozone.

(With inputs from agencies.)