Understanding the Budget: A Step-by-Step Guide

Last week I wrote about my expectations of the Union Budget. Today, I want to talk about how to understand the budget in a very simple way.

A country’s budget is nothing but the plan of how it will meet the expenses and arrange means to achieve them via income sources. Budget is a financial statement that documents the government’s expected expenditure across all fields for the next year and matches it with the income or receipts expected from various sources.

In India, in other than general election years, on every 1st Feb, the Budget Estimate (BE) for the upcoming financial year is presented, along with Revised Estimate for the ongoing financial year and actual figures for the previous financial year. The Revised Estimate (RE) is an updated version of the Budget Estimate, reflecting changes and adjustments made during the fiscal year. The Actual figure represents the final, audited amounts of government revenues and expenditures for the completed fiscal year. In the election year, an Interim budget is presented that includes estimates of revenue and expenditure for the entire financial year, but it is primarily intended to cover the period until a new government takes office. An interim budget is later followed by a Full budget after the new government comes to power.

Understanding the budget and its breakdown is crucial for analyzing its impact on the economy and gauging the broader direction in which the country is progressing.

The two broad parts of the budget are: 1) Receipts and 2) Expenditures. Each part can be further categorized into Revenue and Capital.

Revenue receipts include the Government’s recurring income through tax revenue (net of states’ share)—direct and indirect taxes—and non-tax revenue such as dividends from PSUs, interest receipts, fees, fines, etc. Income tax, charged on personal earnings, and corporation tax, charged on corporate earnings, are the main sources of direct tax and represented a combined share of 57% in the gross tax revenue of the interim budget for FY 2024-25, a 13% increase from revised estimates for FY 2023-24. High direct tax revenue suggests an increase in people's and companies' earnings. Goods and Services Tax (GST), Customs Duty, and Excise Duty constitute major indirect taxes. An increase in indirect tax collection reflects buoyancy in the economy and a surge in transactions. GST accounted for 28% of the gross tax revenue in the interim budget for FY 2024-25, a 12% increase from the revised estimates for FY 2023-24.

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Capital receipts include borrowings raised by the Government, aid from multilateral financial institutions like the IMF and World Bank, and disinvestment. Through disinvestment, the country raises money by selling stakes in Public Sector Undertakings (PSUs), which also increases operational efficiency. Against the budgeted disinvestment estimate of Rs. 61,000 crore for FY 2023-24, the revised estimate stood at Rs. 30,000 crore. For FY 2024-25, a disinvestment target of Rs. 50,000 crore has been set in the interim budget.

Revenue expenditures include outlays on routine operational activities, salary and pension, subsidies, grants, etc., that do not lead to the creation of capital assets. A budget with above-normal revenue expenditure is termed ‘Populist’. It increases the money supply in the economy and boosts demand, especially in consumer spending, potentially resulting in inflationary pressure if demand surpasses supply. This year it is likely that the government may resort to populist measures to secure vote share ahead of the three state legislative assembly elections – Maharashtra, Jharkhand and Haryana.

Capital expenditures include building physical assets, capacities, and infrastructure, leading to employment generation, increased aggregate demand-supply, and long-term growth. In the interim budget, capital expenditure for infrastructure development and employment generation has been increased by 11.1% to Rs. 11,11,111 crore, representing 3.4 % of the GDP.

The excess of budgeted receipts over budgeted expenditure creates a Surplus budget, while a shortfall results in a Deficit budget, and equality results in a Balanced budget. Classical economists advocated for a balanced budget—meeting needs with available resources—but modern economists support a deficit budget to meet developmental needs with borrowed funds, achieving job creation and growth.

The Budget also serves as a fiscal measure to control inflation and as a counter-cyclical demand-supply management tool. During a recession, the Government might adopt an expansionary approach by increasing spending and reducing taxes to increase the money supply and revive the economy. Conversely, during rising inflation, a contractionary approach by reducing spending and increasing taxes could help maintain price stability..

Most countries today follow a deficit budget, generally expressed as a percentage of nominal GDP, which is economic growth plus inflation. Equity markets usually welcome higher government spending, as increased money flow results in higher demand, more transactions, and growth.

However, bond markets tend to react negatively to government borrowing, as it pushes up yields and lowers bond prices. Additionally, higher borrowings to meet the deficit can increase interest costs and sovereign risk.

As a developing country, India also follows a deficit budget but is gradually controlling it. This is reflected in the 5.1% fiscal deficit (shortfall caused by excess of expenditure over receipts) target set for FY 2024-25 in the interim budget and the revised 5.8% budget deficit level for FY 2023-24, initially set at 5.9%. The government also plans to control the fiscal deficit to 4.5% in FY 2025-26.

Moreover, India’s double-digit increase in infrastructure spending in the interim budget reflects the policymakers' firm determination towards long-term growth and making India the third-largest economy in the world. Whether the developmental stance of the interim budget continues or populist measures are introduced in the present government’s third full-year budget, following the less-than-expected election win, will be revealed on 23rd July.

I am confident that after getting this brief idea on the broader aspects of the budget, you will be in a better position to analyze the upcoming budget and hone your macro-economic considerations in your investment decisions.

Technical Outlook


Nifty closed the week higher at 24,530.90, marking a 0.12% increase from the previous week. However, after a sharp decline last Friday, the index closed lower in the daily time frame after marking its all-time high of 24,854.80.

Global markets have also shown slight weakness in the short term which impacted the domestic market. Nifty remains above its 20-day moving average (DMA) around the 24,200 level, which serves as a crucial support zone. The primary trend remains strong as long as Nifty holds above the 24,140 level.

The India VIX, currently at 14.82, is approaching the 15 level, indicating probable increased volatility that could unsettle the bullish sentiment. Some sector rotation might drive the market in the short term, particularly following the upcoming key event of the Final Budget.


Here’s How Digital Public Infrastructure (DPI) Reform Will Revolutionize Stock Market

The finance minister recently announced the implementation of Digital Public Infrastructure (DPI) in agriculture to cover farmers and their lands. This initiative is a part of the broader Digital India campaign, which is built on the foundation laid by the National Land Record Modernization Programme (NLRMP), now known as the Digital India Land Records Modernization Programme (DILRMP). DILRMP aims to modernize land record management, minimize disputes, and enhance transparency.

Revolutionizing Land Management
The digitization of agricultural lands under DPI will allow the government to maintain comprehensive and accurate records of farming land across the country. This will include land-wise information on crops, which is crucial for managing the steady demand and supply of agricultural products. By enhancing the accuracy and transparency of land records, DPI will significantly reduce land disputes and facilitate easier access to land-related information on a single click.

Key components of this initiative include the digitization of land records, cadastral maps, and the updating of all settlement records through surveys and resurvey. Each land will receive a Unique Land Parcel Identification Number (ULPIN) or Bhu-Aadhaar, and urban land records will be digitized using GIS mapping. Additionally, the DPI will include the JanSamarth Kisan Credit Card, which will provide farmers credit for farming purposes as short-term credit for crop cultivation or as a working capital need at a lower rate of interest.

Impact DPI Introduction on the Stock Market
The introduction of DPI for agriculture is set to have wide-ranging effects on various sectors of the stock market. Here’s a closer look at how different sectors and companies will benefit:

1. Boosted Efficiency and Growth for Agriculture-Based Enterprises
DPI will allow agriculture-based companies to optimize logistics, supply chain management, and resource allocation. With precise data on crop readiness and harvest times, companies can streamline operations, reducing wastage and improving efficiency. This access to comprehensive agricultural data will drive innovation in product development and at service delivery. Companies will be able to develop tailored products that meet the specific needs of farmers, expanding their market reach and revenue potential. These advancements will likely lead to higher profitability valuations for agriculture-based companies as innovation.

2. Advantage to Lending Institutions
The issuance of JanSamarth Kisan Credit Cards to farmers will improve their access to credit and insurance by providing accurate land and yield records. Financial institutions will be able to assess creditworthiness more effectively, reducing defaults and enhancing financial stability. Digital land records may streamline the process of using land as collateral for loans, improving farmers' access to credit. This increased investment in farming can surge the advances of the banking and financial services sector companies. Moreover, enhanced access to credit can also benefit microfinance institutions (MFIs) and non-banking financial companies (NBFCs) which usually cater to rural areas.

3. Technological Advancements and Opportunities to IT Companies
DPI’s introduction of IT infrastructure into agriculture will foster partnerships between IT companies and agricultural organizations, as well as government bodies. These collaborations will drive the development of innovative solutions and facilitate the exchange of expertise and resources. The demand for digital platforms, cloud computing, and cybersecurity solutions will drive business growth and innovation in the IT industry. This will open new markets and revenue streams for IT companies, enhancing their market position and stock valuations.

Conclusion

The recent announcement of Digital Public Infrastructure (DPI) for agriculture marks a transformative step for the various sectors, with significant impacts on agricultural productivity, efficiency, and sustainability. Agriculture-based companies and related sectors are likely to see improved performance and increased market valuations, driven by the transparency, efficiency, and competitiveness brought about by DPI. This reform not only modernizes land management but also creates vast opportunities across multiple sectors, promising substantial benefits for the stock market and the economy at large.

Technical Outlook


Nifty experienced a volatile week following the budget presented last Tuesday, ending at 24,835, up 1.24% for the week. The index once again surpassed the 10-day moving average, with the daily RSI recovering from lower levels to settle at 70. Nifty’s primary trend remains positive, following higher highs and higher lows. The strong support remains at 24,450, while 25,000 serves as an immediate hurdle; a breakout above this level could extend the rally toward the 25,250-25,350 zone.

The global market remains neutral whereas the domestic market appears stretched. India VIX currently stands at 12.25 and remains below the 15 mark, there would be a mixed outlook. Overall, Nifty is anticipated to trade sideways with a positive bias.


Avoid Tinkering, Maintain Status Quo

Today when I write this column, it is slightly more than a month ago when election results were announced. After the initial hiccups, the markets stabilized once the signs of a stable government at the centre became brighter. The benchmark indices –Nifty and the Sensex-- have yielded an 11.96% return in the last month. This shows that the election outcome has benefitted the market and whoever looks at the 2024 results in 2029 will think that this was the great election outcome.

We were already in a secular, long-term bull market much before the elections were announced due to a variety of factors. Uncertainty ahead of the election has been overcome and people are expressing their expectations to the government about what it should do in its forthcoming budget. In my mind, the government should continue with the policies it persuaded in its previous term (2019-2024) and should not go for any Big Bang or radical changes but just maintain the status quo.

For this market to continue without any roadblocks with respect to the budget, there are two very simple expectations; first, this budget should lay out the vision of this government for the next five years, like they did in their earlier stint. This is the first budget of the new government and they should lay out their entire vision in terms of what their likely focus areas would be so that there is clarity among the market participants on what directions this government wants to take going ahead.

The second one is that the government ideally should continue to maintain its focus on asset building, and nation building, which is by way of its investment in defence, infrastructure, road building, ports, railways, etc. The policy approach adopted by this government in its earlier stint should continue and there should not be any shift towards any populist measures, which are anticipated, because of the pressure of the coalition. That would disturb the market sentiment and impact the premium that the Indian market enjoys because of the Government’s structure. We should keep in mind that the current bull market is the outcome of the policies pursued by the government and not vice versa.

Now from the capital market perspective what should the government do and not do; the biggest thing the government should do is to revisit the investment limit allowed under section 80C of IT Act, 1960. The investment limit of Rs 1,50,000 allowed in the older regime has not been revised for quite a long period of time. This limit under the section was revised in 2014 by the then Finance Minister Arun Jaitley, and since then it has not been increased despite steeply rising living costs and inflation, particularly during the Covid era. Alternatively, the government could simply look to increase the limit under the new regime to INR 10 Lakhs from the current limit of 7 Lakhs. This could spur consumption and give further impetus to the economy.

In order to maintain the equilibrium in the equity market, the government should not fall to the temptation of tinkering with any of the taxes concerning the capital market. The government should not trifle with respect to capital gains tax structure, STT, or derivatives on any of these matters. I think the market is stable. Any dramatic changes in any one or all of the above could result in instability, with either a positive or negative impact, which is avoidable at this juncture.

The Indian government has seen the power of retail investors. The retail investor has evolved as a wall against the hot money flow of foreign portfolio investors (FPIs) over a period of time. The retail ownership in the market has gone above the FPIs because of which we have become a stable and self-sufficient country from the capital market perspective. In order to reward or give further impetus to the retail investors and encourage them further to prolong their investment in the capital market, one of the following two things can be considered by the government in the interest of India’s investment ecosystem.

There is double taxation on Dividends paid by the company. The company already pays corporate tax on incomes and dividends are distributed from post-tax income. These dividends are again taxed in the hands of investors resulting in double taxation on the same income. Either the government can look at liberalizing provisions related to tax on dividends bringing them in line with partnership firms or alternatively, it can come out with a structure where exemptions are granted in case dividend income is reinvested in equities. This shall be akin to allowing exemption on reinvesting capital gains on the sale of Real Estate under section 54 of the Income Tax, Act, where the capital gains are exempted. If this is also allowed in case of reinvestment of Dividend income, investors will be incentivized. This would further support the theme of investment in the market and the creation of wealth. The government should look at this positively in the forthcoming budget.

In the end, I would reiterate that there’s no need to puncture or disturb the current market equilibrium and something that is already in Autopilot mode.

Technical Outlook


Nifty closed the week higher, extending its six-week winning streak with a new high of 24,592, settling at 24,502, a 0.73% increase from the previous week. The global markets, including the US and European indices supported the domestic sentiment. The India VIX remained stable within the 12-15 zone, reflecting that the index remains stable.

In the daily timeframe, Nifty continued its upward path within a rising channel, marked by higher highs and higher lows. Nifty holds above the 20-day moving average. Despite recent range-bound trading with a positive bias, the support is placed at 24,140, while resistance remains at 24,720 followed by 24,850 levels.


5 Investing Lessons from India’s World Cup Triumph

India’s victory in the T20 World Cup, ending a 17-year wait, sparked joy among billions of Indians. The triumph showcased emotions, perseverance, patience, and determination. This win also unveils five crucial lessons linking sports achievement to financial success. Let’s explore these insights through India’s World Cup triumph.

1. Resilience - India’s victory in the final exemplifies the importance of trusting processes even amid adversity. Despite having a slim 3% chance of winning, the Indian team’s belief in their strategies proved decisive. This principle resonates in investing, where initial expectations often differ from actual results. Investors may be tempted to exit prematurely due to short-term market fluctuations, missing out on potential long-term profits. Warren Buffett’s approach underscores the value of patience and long-term vision, as he earned 80% of his wealth in the final 20% of his investment period. This highlights the significance of trusting and sticking to long-term investment strategies.

2. Diversification - Rohit Sharma’s quote before the Final match, “For me to climb the mountain (Winning World Cup), I will need everyone’s oxygen (contribution) “mirrors the essential strategy for investing. Diversifying investments across different sectors helps manage risks linked to sector-specific declines. Just as cricket teams balance batting, bowling, and fielding, investors diversify their portfolios to safeguard against losses in individual stocks.

3. Not to get carried away by emotions - Suryakumar Yadav contrasted the approaches of the two World Cups, noting that during the 50 overs World Cup they boarded the bus for the final with the expectations of going and collecting the World Cup, while during the current triumph, nobody talked ahead of the time, their mind and feet were grounded. This analogy extends to the stock market, where mastering emotions is key. Emotions often deviate you from reliable strategies. While such decisions may yield short-term gains, they carry higher risks and stray you away from trusted methods. In investing, maintaining discipline amidst market fluctuations is crucial for consistent performance and avoiding potential losses caused by impulsive actions.

4. Cometh the hour, cometh the man - It is a saying in cricket “When the going gets tough, the tough get going” which is exactly what Virat Kohli displayed in the Final. The same mindset can be linked to large-cap stocks in the market. Investors must strategically allocate large-cap stocks to weather market downturns and stabilize investment portfolios.

5. Hard work, consistency, and Humility - The Indian team’s dedication since their last victory in 2013, their unwavering commitment in ICC tournaments, and their humility to consistently hit the practice session and follow the routine led them to achieve this success. Similarly, many retail investors succeed in the stock market initially but later lose their wealth due to overconfidence. To sustain wealth in the stock market, it’s essential to adhere to a consistent investment philosophy over time and maintain disciplined strategies that have proven effective, rather than chasing fleeting trends or succumbing to excessive risk-taking.

In conclusion, India’s cricket triumph serves as a powerful analogy for navigating the complexities of the stock market. By embracing principles of resilience, diversification, emotional control, strategic approach, and consistent effort, investors can enhance their chances of achieving financial success.

Technical Outlook


Nifty marked a new all-time high of 24,401 last week and settled at 24,324, up 1.30% on a weekly basis. The robust performance of the US and the European market acted as a catalyst for the domestic market's surge.

The India VIX, known as the fear gauge, ended at 12.70, dipping 8.02% over the week, which provided more comfort to the bulls. Most sectors ended with gains, with Nifty IT emerging as the best-performing sector with a gain of 4.32%.

Nifty formed a bullish candle with an open-low same pattern on the weekly chart. Looking ahead, there could be a minor correction after consecutive weekly rises. Nifty has support at the 24,000 level, followed by 23,800 levels while resistance is placed at 24,600, followed by 24,720 level.