Fiscal Deficit Until November Touches 50.7% of FY24 Target

An analysis of India’s improving fiscal deficit situation in 2023 and impacts on industries and investors.

Source and Citation: Article from ET Bureau published on Dec 30, 2023 originally titled “Fiscal Deficit Until November Touches 50.7% of FY24 Target”

Table of Contents

Analysis of this news for a layman

The fiscal deficit of the Indian government is the difference between its spending and earnings. A high deficit indicates that the government is spending more than it is earning and needs to borrow funds.

As of the latest data, India’s fiscal deficit in the first eight months (April-November 2023) was 50.7% of the full-year target. This represents an improvement from the 58.9% deficit during the same period last year.

The government has managed to control its spending while tax collections have increased. This has helped keep the deficit lower and within the target of 5.9% of GDP for the fiscal year 2023-24.

In absolute numbers, the deficit has decreased from ₹9.78 lakh crore to ₹9.07 lakh crore year-on-year. Additionally, the monthly deficit for November also decreased by half to ₹1.03 lakh crore.

This data indicates that the government’s budget assumptions are on track, and the reduction in the deficit provides more fiscal room for public spending without significantly increasing debt levels.

Impact on Retail Investors

For Indian retail equity investors, the government’s improving fiscal situation has various implications:

Positives:

Lower borrowing by the government should prevent a major rise in interest rates by the Reserve Bank of India (RBI). This benefits rate-sensitive stocks in sectors like real estate, auto, and banking.
The government’s increased financial capacity can support more public spending in infrastructure and other job-creating sectors in the 2023 Union Budget. Companies in construction and capital goods sectors may benefit.
A stronger rupee exchange rate may result from India’s improved macroeconomic stability due to lower deficits. This can benefit IT and pharma exporters like Infosys, HCL Tech, and Sun Pharma.

Negatives:

Continued fiscal consolidation could lead to a reduction in corporate tax incentives in the upcoming Budget. This could negatively impact the short-term earnings of companies like Asian Paints and Ultratech Cement.

Overall, lower fiscal deficits help stabilize India’s investment environment, but some stocks may face specific policy-related risks. Investors should assess the indirect impact of the Budget on sectors beyond the direct influence of the deficit.

Impact on Industries

Some Indian industries are positively and negatively affected by the improving central government fiscal deficit trends:

Infrastructure and Construction Materials:

Lower deficits enable greater public capital spending on infrastructure projects such as roads, ports, and urban housing. Companies in sectors like cement (Ultratech), steel (Tata Steel), and engineering (L&T) may benefit from higher orders.

Automobiles:

Stability in interest rates due to reduced government borrowing may boost auto sales. Commercial vehicle firms (Ashok Leyland), two-wheeler makers (Hero Moto), and car manufacturers (Maruti Suzuki) stand to gain.

Banking and Financial Services:

A more moderate interest rate regime supports loan growth and credit penetration. Private banks (ICICI Bank), insurers (SBI Life Insurance), and NBFCs (Bajaj Finance) may benefit.

Energy and Utilities:

A higher subsidy burden may remain a risk if deficits rise again. Therefore, a stable outlook helps electricity distribution (Power Grid) and gas utilities (GAIL). The growth of renewables may slow due to fiscal constraints.

While infrastructure and manufacturing industries benefit, fiscal prudence could pose risks for rate-sensitive sectors in the longer term if it limits overall growth stimulus.

Long Term Benefits & Negatives

Longer term benefits of narrowing India’s fiscal deficit:

Macroeconomic stability: Lower borrowing requirements enhance India’s financial credibility globally, strengthen the rupee exchange rate, and prevent imported inflation spikes.
Investment climate: Stable interest rates and improved sovereign ratings make India more attractive to foreign investors, supporting growth.
Capital formation: Enables public investments in infrastructure, healthcare, education, etc., without crowding out private capital expenditure, enhancing the economy’s supply potential.
Consumption: Lower inflation helps protect household budgets, and job creation through fiscal stimulus sustains consumption demand, benefiting various industries.

Potential negatives:

Growth sacrifice: Excessive restraint on fiscal spending could undermine short-term demand in the economy, temporarily slowing GDP expansion.
Inequality risk: Lower corporate taxes and containment of social spending to control the deficit may disproportionately impact poorer sections of society.
Competitiveness issues: If excessive tax buoyancy or subsidy cuts are used for deficit reduction rather than boosting manufacturing competitiveness.

Therefore, India’s policymakers must strike a balance between fiscal prudence and a growth focus for the economy to sustainably benefit in the long run from the lower deficit trajectory achieved.

Short Term Benefits & Negatives

Short-term positives from lower fiscal deficit:

Strengthened macroeconomic buffers in the current year itself, reducing risks of inflation and trade deficits. This boosts forex reserves and cushions against external shocks.
A positive signal for the 2023 Union Budget, where additional public spending may be authorized without significantly increasing borrowing costs. This supports short-term economic growth.
Corporates also benefit from stability in lending rates and input costs, protecting profit margins for the fiscal year. This enhances business confidence and investment intentions.

However, some short-term negatives include:

Sudden reductions in subsidies or tax hikes to further reduce the deficit can negatively impact vulnerable sections of society in the near term.
Excessive focus on fiscal prudence risks slowing down economic growth in the short term, potentially affecting sectors like construction and real estate due to spending cuts.
Market borrowing is still elevated compared to pre-Covid levels, so bond yields could rise again if global crude oil prices or US interest rates spike, limiting policy flexibility.

Therefore, while the fiscal situation appears to be under control currently, a balance between short-term growth and medium-term deficit sustainability must be maintained. Preventing market anxiety requires a stable borrowing plan.

Potential Impact of India’s Lower Fiscal Deficit on Companies:

Indian Companies Likely to Gain:

Infrastructure Companies: Increased capital expenditure (Capex) in the second half of the fiscal year could benefit infrastructure companies like L&T, Larsen & Toubro Infotech, and KEC International. Higher government spending on projects like roads, railways, and renewable energy could lead to increased order inflows and revenue growth for these companies.
Banks and Financial Institutions: Lower fiscal deficit implies reduced government borrowing, easing interest rates and potentially boosting loan growth for banks like HDFC Bank, ICICI Bank, and SBI. Increased lending activity could positively impact their profitability and stock prices.
Consumer Staples Companies: Continued focus on revenue expenditure could sustain spending on welfare schemes and subsidies, potentially boosting demand for basic goods from companies like ITC, HUL, and Britannia Industries. Increased consumer spending could drive revenue and profit growth for these companies.
Cement and Steel Companies: Higher infrastructure spending in the second half could boost demand for cement and steel from companies like ACC, Ambuja Cements, Tata Steel, and JSW Steel. Increased order book and production volumes could positively impact their stock prices.
Telecom Companies: Continued government focus on digital initiatives and infrastructure could benefit telecom companies like Bharti Airtel, Jio, and Vodafone Idea. Increased rural internet penetration and digital payment adoption could drive revenue and subscriber growth for these companies.

Indian Companies at Risk:

Defense Contractors: With the lower fiscal deficit, defense spending might face tighter restrictions, potentially impacting order inflows and revenue growth for companies like Bharat Electronics, Mazagon Dock Shipbuilders, and Hindustan Aeronautics.
Power & Renewable Energy Companies: If the government prioritizes other sectors over renewable energy due to fiscal constraints, it could delay project awards and impact growth prospects for companies like Adani Green Energy, Suzlon Energy, and Tata Power.
Airlines & Hospitality Companies: Continued tight control on government spending could limit travel and tourism budgets, potentially impacting airlines like SpiceJet, IndiGo, and hospitality companies like Indian Hotels and Taj Hotels. Lower business travel and holiday spending could affect their revenue and profitability.

Global Companies:

Foreign Investors: A lower fiscal deficit and improving economic stability could attract foreign investments, potentially benefiting India-focused funds and asset management companies. Increased investment inflows could positively impact the Indian stock market as a whole.
Foreign Infrastructure & Engineering Companies: If the government’s focus on infrastructure spending increases, foreign companies like Siemens, ABB, and Caterpillar could benefit from potential joint ventures and project partnerships with Indian companies.

Global Companies at Risk:

Commodity Exporters: Lower government spending could potentially reduce imports of commodities like coal and steel, impacting companies like BHP Billiton, Rio Tinto, and Vale.

Market Sentiment:

The news of a lower fiscal deficit could lead to positive sentiment for companies likely to benefit from increased infra spending, banking & finance, and consumer staples sectors.
Companies potentially facing slower growth due to reduced government spending in sectors like defense and certain infrastructure segments might see negative sentiment.
Overall market sentiment will depend on the final FY24 spending trajectory and how the government balances fiscal prudence with economic growth initiatives.

Important Note:

This is an analysis based on the limited information provided and should not be considered financial advice. Please consult with a professional financial advisor before making any investment decisions.

I hope this organized analysis in 100 words for each point clarifies the potential impact of India’s lower fiscal deficit on various companies across different sectors.