FORESIGHTS, JULY

Upcoming Budget – Staying the Course or Being Populist?

The NDA government's strategy over the last 10 years has broadly focused on the following: investing in infrastructure and capital expenditure, launching multiple schemes like Pradhan Mantri Gram Aavas Yojana which benefit the bottom of the pyramid, focusing on the ‘ease of doing business’, improving focus on manufacturing through PLI, and providing food grain support to the poor.

Apart from the latter – ‘food grain support to the poor’ – the government’s general focus has been on building ‘real’ assets – roads, houses, toilets, manufacturing facilities, renewable energy assets, etc. This has largely been achieved with minimal ongoing subsidies and on a commercial basis. Additionally, the government did not resort to ‘more money in the pocket of the consumers’ in the form of tax cuts. The expectation was that economic growth through infrastructure and manufacturing would benefit the overall population.

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Budget Should Facilitate Move Towards Viksit Bharat: With the economy recording high GDP growth and the general elections having just concluded, the upcoming Union Budget is a prime opportunity for the Government to focus on long-term growth and resolve structural issues, aiming for India to become a developed economy by 2047.

Focus on Improving Rural Health: Agriculture is crucial to India’s economy, with 46% of the workforce dependent on it. However, low productivity results in poor rural income. Improving productivity through modern technology and infrastructure will enhance rural income. Skilling the rural workforce to enable transition to manufacturing and services sectors can reduce dependence on agriculture. Continuing focus on rural welfare schemes in the Budget and enhancing rural health are essential for broader economic recovery and achieving developed economy status.

Sustain Infrastructure Investment: The government has relied on capital expenditure (capex) for growth, increasing capex to GDP from 1.5% in FY18 to 3.2% in FY24. Interest-free loans to state governments for capital expenditure, amounting to Rs 2.3 trillion, were also budgeted in the last two years. Given capex’s strong multiplier effect, the government should maintain its focus on infrastructure to boost global competitiveness and attract foreign direct investment (FDI).

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With the election season concluded, the finance minister is set to present the Union Budget this month. This provides an opportunity to look at the divestment plans and progress. The divestment has fallen short of the budget target for five consecutive years. Over the past few years, divestment has been impacted by financial market volatility due to macroeconomic and geopolitical headwinds, procedural delays, litigations by labour unions and other interest groups against divestment, delay in demerging non-core assets, and pricing issues. Of late, the government has been relying on a small ticket OFS route (Offer for Sale) for divestment. However, they are unlikely to generate substantial proceeds unless big-ticket divestments are undertaken.

We have analysed the potential for divestment, with the government staying in control over the governance of the public sector firms (assuming the government retains a 51% stake) at current market capitalisation. Our analysis shows a huge scope for divestment worth Rs 11.5 trillion in the years ahead. However, the decision to divest will depend on the industry's strategic nature, the firm's profitability, prevailing financial market conditions, and social considerations. Given the comfortable fiscal situation amid strong non-tax receipts due to dividends from RBI and public sector firms and ongoing spectrum auction, the government may not be inclined to push hard on divestment this year. Having said that, we believe the government will stick to the FY25 target of miscellaneous capital receipts (which includes divestment) of Rs 500 billion. With the demerger of the Shipping Corporation of India's land assets, its divestment looks likely in FY25. Other potential divestments include Pawan Hans and CONCOR.

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Turnover in Indian capital markets has grown by 117% and 126% in FY23 and FY24, respectively, from Rs. 18,076 trillion in FY22 to Rs. 39,153 trillion in FY23 and further to Rs. 88,550 trillion in FY24. This growth is completely dominated by the growth in F&O segment turnover which has significantly grown post-COVID from Rs. 3,448 trillion in FY20 to Rs. 87,956 trillion at a high CAGR of 125%. Specifically, in FY24, the F&O segment turnover grew by 128% as against 119% in FY23. There was a slight decline in growth rate in FY23 which was due to the migration of work-from-home models to hybrid models along with heightened geopolitical tension and the muted growth in active user base. The growth in F&O turnover is driven by the very low brokerages charged by the brokers, leveraged positions, ease of trading due to improved and simpler user interface of the trading platforms and algorithmic trading facilitated by some of the stockbrokers. Leading proprietary trading firms have also contributed to the massive volumes in the F&O segment by employing algo trading and Greek strategies. With the emergence of zero brokerage models, F&O turnover is expected to remain elevated, unless there is some regulatory intervention in the sector.

The cash segment, which is considered as the long-term wealth creator, has witnessed a moderate CAGR of 23% in FOR SIGHTS July 2024 I 06 turnover post covid from Rs. 97 trillion in FY20 to Rs. 218 trillion in FY24. The segment has witnessed a couple of peaks and troughs in terms of y-o-y growth rate post covid. In FY21, it grew by 70% but in FY22 the growth rate declined drastically to 9%. Further, in FY23 the segment surprisingly witnessed a degrowth, for the 1st time since FY16, of 20%. The decrease in growth rate and ultimately degrowth was reportedly due to the return to the workplace for most of the retail workforce and the uncertainties in the economy due to geo-political tensions which affected investors' sentiment negatively for cash and carry trades.

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With about 64 million MSMEs in India overall, the total funding requirement for the sector is projected to reach ₹134.40 lakh crore. Of this, total debt demand is estimated at ₹106.11 lakh crore, of which ₹56.24 lakh crore or 53% is anticipated to be the potential market size addressable through formal funding sources such as banks and NBFCs. Considering the existing supply of ₹28.00 lakh crore (based on FY24 projections), the credit gap is estimated at approximately ₹28.24 lakh crore. Moreover, as the economy formalizes, unaddressed demand currently met through informal funding sources is anticipated to transition towards institutionalized channels over the long term, resulting in a potential credit gap of ₹78.13 lakh crore.

NBFCs emerging as an important player in MSME

lending Lending to MSMEs has garnered increasing attention not only from banks but also NBFCs. Over the past five fiscal years, PVBs have demonstrated a compounded annual growth rate (CAGR) of approximately 18%, whereas PSBs have recorded a CAGR of about 5%. The pursuit of better yields and improving asset quality have led to PVBs increasing their focus on MSME lending, with PSBs ceding their share to PVBs. NBFCs have reported approximately 31% CAGR growth in the last three fiscals. Notably, these entities have seen a substantial percentage increase in their share of MSME lending, also reflected in their loan book growth compared to banks, with NBFCs reporting more than 3x growth in FY23 y-o-y compared to both PSBs and PVBs.

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In FY22 and FY23, the PV industry experienced substantial year-on-year volume growth due to pent-up demand post-Covid recovery and new product introductions. UVs played a significant role, with volumes increasing by 41.0% in FY22 and 33.2% in FY23. The industry benefitted from lower interest rates and an increased desire for personal mobility in the wake of the pandemic.

However, during FY24, in line with CareEdge Ratings’ expectation, the PV Industry recorded moderate volume growth of 7.4%. Factors contributing to this included the levelling off of pent-up demand, higher vehicle prices, and the high base effect of FY23. Despite these challenges, a strong order book in FY24, new model launches, and increasing SUV demand kept the sales momentum rolling. While the passenger cars and vans segment volumes de-grew by 7.2% in FY24 on account of pressure on demand for entry-level variants due to high-interest rates, an inflationary environment and increased input costs given the mandatory safety features, and BS-VI emission standards which translated to higher vehicle prices, the SUV segment continued its dominance, with volumes surging by 22.4% due to strong demand and a robust order book.

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The Indian pharmaceutical industry has shown a commendable CAGR of approximately 8% between FY18 and FY24, with the domestic market expanding by 7% and exports by 8%. FY24 was particularly strong, with the domestic sector growing by 9% and exports by 10%. Several factors contributed to the domestic market's 9% growth in FY24. There was a notable rise in demand for both acute and chronic segments. The revision in prices adopted by the pharma companies as allowed under the National Pharmaceutical Pricing Authority (NPPA) to the extent of 4% to 5% positively impacted overall revenue growth. The launch of new products also played a role in driving growth by about 2% to 3%.

Therapies for cardiac conditions, diabetes, and central nervous system (CNS) disorders experienced over 10% y-o-y growth, with other therapeutic areas also showing strong performance. Apart from the above, about 2% to 3% was due to a rise in demand for the existing therapies. Exports showed robust growth, especially in the North American market, which comprises about 40% of India’s total pharmaceutical exports. After witnessing significant pricing pressures post-COVID-19 up to FY23, the region saw a turnaround with a growth rate of approximately 13% in FY24.

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After a two and a half year of hiatus, the top three telecom players (referred to as telcos) have implemented up to 20% tariff hikes. These increases can expand the telcos' profit before interest lease depreciation and tax (PBILDT) by 20% to 22% in the current fiscal year 2025. This is a structural positive for an industry whose Return on Capital Employed (ROCE) is weighed down by huge investments in 5G roll-out including spectrum purchases.

CareEdge Ratings analysis estimates the revised tariffs will improve the telcos blended average revenue per user (ARPU) by about 15% to ₹ 220 in the current fiscal 2025 from around ₹ 191 in the fiscal 2024. Our analysis expects every ₹ 1 increase in ARPU FOR SIGHTS July 2024 I 14 to add about ₹ 1000 crore to the Industry’s PBILDT. With 15% growth in blended ARPU expected, the expected expansion of PBILDT will aid the telcos to deleverage the capital, technology upgrades and in network expansion. The growth in PBILDT expansion factors in net subscriber addition of 2-3% followed fewer consolidations in SIM and adoption of 4G/5G services.