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Budget, Adani and Fed!!!

Updated: Feb 5, 2023

Greetings from Team Carnelian!!!

Last few days have been eventful to say the least – The Budget, Adani Group, FOMC meeting... While two of them have been positive, one has shaken the markets. Let’s delve into them:

Union Budget 2023-2024:

Every year after the budget, the most common conversation across corridors is “Isme naya kya hai? gareeb aur gareeb, ameer aur ameer and middle-class ke liye kuch nahi” – but this time around, madam Finance Minister has taken due care of this, embracing all sections of the society. Budget 2023-2024 is “one for all and all for one”. Not only that, at a broader level – this budget is a fine balance between “capacity building” and “welfare” yet maintaining the fiscal deficit.

A sharp increase in capex for the 4th consecutive year despite running fiscal deficit requires courage, conviction & long-term thinking. We all know that the impact of capex lasts over a very long time while the impact of opex is short lived. On the other hand, the FM’s actions will lead to an increase in disposal income on account of rationalization in personal income tax rates with no meaningful reduction in spends across welfare schemes. The budget has once again turned out to be successful in addressing the structural issues instead of taking short-term measures. It truly embarks upon the path of “Aatmanirbhar Bharat” in the “Amrit Kaal” guided by Saptarishi (7 Principles) as mentioned by FM.

Capex, manufacturing and boosting consumption were the highlights of this budget.

Capex and infra outlay:

Capital expenditure continues to grow, in fact this time around exponentially!! – FY24BE capital expenditure stands at Rs10tn – a massive 33% growth YoY. Since the current government’s coming into power in 2014, capex intensity has gone up from 1.5% of GDP in FY18 to 3.3% of GDP in FY24BE; below are few of the interesting highlights:

  • Extension of the 50-year interest free loan to State Governments for capital expenditure by another year.

  • Allocation to the PM AWAS (Affordable Housing) scheme hiked up by 66% to Rs79,000 crs.

  • Continued focus across Jal Jeevan Mission, AMRUT & Smart Cities

  • Identification of 100 critical transport infrastructure projects for the last mile connectivity for ports, coal, steel, fertilizer and food grains sectors will be taken up as priority with a capital allocation of Rs 75,000 crs.

Logistics costs currently is at ~13-14% of GDP in India vs global average of ~8-9%. We strongly believe, the above measures will substantially improve India’s cost & efficiency competitiveness in terms of ease of doing business. This will all have a multiplier impact in boosting the economy.

Manufacturing Focus:

The government continues its focus on promoting manufacturing in the country. The FM reduced basic customs duty (Import duty) on open cells of TV-panel and certain parts of mobile phones, import duty on capital goods and machinery for lithium-ion batteries has also been done away with. The FM also proposed infusion of Rs.9,000 crs in the credit guarantee scheme for MSMEs which will enable additional collateral-free guaranteed credit of Rs.2 tn. Coupled with PLI, lower corporate tax rates for new manufacturing set-ups, de-regulation, and focus on China + 1, we believe India is on the right footing to increase its manufacturing GDP from USD 450bn to USD 1tn over the next 5 years.

Consumption Boost:

The FM has done a wonderful job in boosting consumption across all sections of the society. Under the PM Garib Kalyan Ann Yojana, the Government has continued supply of free grains to priority households for the next full year spending ~Rs2 lac crores. Increase in tax slabs, reduction of surcharge, should all lead to an increase in the disposal income of middle-income households. The above measures will help in boosting consumption across the complete consumer value chain.

Considering this was the last budget before the elections next year, we believe it couldn’t have gotten better, than what has been delivered!

Adani Saga:

This has occupied most people’s minds over the last few days and has been the subject of many news/speculations/memes 😊. We have seen the pressure on Adani stocks in the last few days percolating to the broader markets, largely banks. Through our interactions we understand that the banking exposure of Indian Banks to Adani Group is limited (ranging from 1% to 3% of the overall loan book in each case) and backed by cash flows and assets. Banks are just coming off huge write-offs and are well capitalized. We strongly believe that banks will not have any major impact nor will lead to a contagion impact on the overall financial system and economy at large. Calling of FPO also has been good decision by the group saving huge losses to the investors. On a sentimental front, Adani group stocks have seen a good correction from the recent highs, so the overall damage should be limited from hereon on the overall market sentiments wise unless some unknowns further emerge. We think this worry will settle down soon. We never had any exposure to the Adani group stocks and it is likely to remain so in the foreseeable future.


Through our November letter (Three Peaks & Twin Engine will lead to 70,000), we had highlighted that Inflation, Interest Rate and USD peaks are in sight. The 25 bps hike at the FOMC meeting yesterday marks another deceleration in the pace of the Federal Reserve’s monetary policy tightening campaign. The central bank had raised rates by 50 bps in December and 75 bps at each of its previous four meetings. Similarly, US labour cost increased at their lowest pace in a year in the fourth quarter as wage growth slowed down. We are observing similar case across other economies including India and continue to believe that peaks pertaining to Inflation, Interest rate and USD are behind us. This augurs well for flows towards Emerging markets.

What from here on?

The Budget further strengthens our positive stance on BAM (Banking/Automotive/Manufacturing) stocks. Green shoots across corporate lending are visible as reflected in the numbers of large private banks and public sector banks. Government’s increased spending should further accelerate overall credit growth. In a period of economic pick-up, credit growth exceeds the nominal GDP growth. The revival of the auto sector has just begun. Domestic auto sales volumes across major categories are still below the peak of the last cycle and are gradually picking up. Other actions discussed in the budget will further provide impetus to manufacturing in India.

All said and done, we continue to believe there will be volatility in the current year as we highlighted in our previous letter to you (2023: Tailwinds amidst headwinds), providing ample opportunities for investments and building portfolio in next 3-4 months.

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