Building On Macro Strengths

Budget 2024-25 builds on India’s existing macroeconomic strengths. Investors should focus on diversified asset allocation and maintain a cautious stance on equity

The government’s efforts in maintaining macroeconomic stability and growth have resulted in India boasting some of the world’s strongest macroeconomic indicators. Budget 2024-25 builds on this progress, focusing on eight key areas: agriculture, employment, human development, manufacturing, energy security, innovation, infrastructure, and next-generation reforms.

India’s external position is also robust, on the back of lower external debt-to-gross domestic product (GDP), higher forex reserves, and improved import and export. Corporate debt has also fallen from 65 per cent to 52 per cent of the GDP.  The economy is also on a strong wicket, due to private consumption and improving rural growth.

Strong capital expenditure on infrastructure has also led to a virtuous cycle of growth.

Overall, this Budget supports growth and maintains a positive stance. It significantly benefits the banking sector with provisions to enhance stability and investor confidence. It supports the micro, small, and medium enterprises (MSME) industry with measures for enhanced credit during periods of stress. The government’s focus on sustainable energy is evident through initiatives to shift small and micro enterprises to cleaner energy, energy audits, and advancements in nuclear energy.

Although India’s economic outlook is bright, market valuations remain rich, with the market cap-to-GDP ratio at 140 per cent, much above the historical average of 89 per cent. Investor interest in the equity market has been a dominant theme since Covid-19 until now. When liquidity is excessive and valuations are elevated, there is little or no margin of safety. Consequently, this is a time for a cautious investment strategy.

Equity Approach: Market valuations in mega and large-caps are not excessively high. However, there is a gradual movement from fair value to slightly above fair value across the board. So, it is advisable to adopt a cautious stance on small and mid-cap stocks and keep a stock-specific approach.

Investors should now focus on asset allocation, distributing their investments across equities, debt, commodities, and cash. Such a multi-asset strategy balances risk and return, which is a suitable response to the present market conditions.

Given India’s fundamentals and the long-term growth story, existing investors should stay invested. Equity investors should focus on large-cap, flexi-cap, business cycle, manufacturing, energy, or hybrid categories, such as multi-asset, balanced advantage, equity and debt, and asset allocation schemes.

Fixed-Income Approach: Fixed-income markets were neutral to the Budget announcements. But given that economic growth will remain buoyant and inflation will stay within the Reserve Bank of India’s tolerable range, our outlook on fixed income  remains consistent—accruals continue to be the predominant source of return. We prefer the shorter end of the duration curve and maintain a neutral stance on the longer duration. Active duration management is crucial at this economic cycle point.

India’s structural reforms chart a unique economic growth trajectory for the coming decades. The Budget builds on the government’s reform achievements over recent years. The key challenge is that Indian markets are not inexpensive, which highlights the need for conservative investing strategies.

By Sankaran Naren, ED & CIO, ICICI Prudential AMC