Banking vs Defence vs Railway Sector: Budget 2024 Expectations From 3 Pivotal Areas of The Economy

On the railway, defence, and banking industries front, the Union Budget of 2024 is anticipated to capitalise heavily. These three industries are likely to receive special attention since they are the 3 core of the Indian economy. Since the massive public sector bank (PSB) mergers in 2020, India's banking industry has exhibited development and resilience. As a result, the goals for the Budget 2024 are to raise capital inflow for financial stability, nurture measures for non-performing assets (NPAs), and promote advancements in digital banking in addition to MSME support.

It is projected that the budget will approach 2% of GDP due to the sector's strategic significance and the government's mission to localise defence manufacture and procurement. The government's main plan for domestic military production in Budget 2024 seeks to modernise the "Make In India" strategy and enhance research and development spending.

The allocation of capital expenditures towards enhanced travel experiences is anticipated from Budget 2024 including the announcement of the production-linked incentive (PLI) scheme and budgetary support for developing and extending metro rails, as budgetary allocation has gone up to Rs 2.55tn for FY25, up from Rs 2.40tn in FY24.
As per an exclusive interview taken with Ramesh Punugu, Global Head, Buy-side Research, Acuity Knowledge Partners, here are pre-budget expectations from the banking, defence and railway sectors based on various themes.

Pre-Budget Expectations For Banking Sector

India's banking sector has shown growth and resilience, especially since the mega-public sector bank (PSB) mergers in 2020. Not surprisingly, the Nifty PSU bank index returned ~88% in FY24 as compared to the 14% return from the Private bank Index in the same period.

PSU banks' credit fundamentals have improved across all parameters as such the government did not make any budgetary allocation for bank recapitalization over the past two years. We expect this trend to continue in the current budget as well. Going forward the key expectation for the banking sector would be:

Divestment

Given that the PSU bank valuations are near all time high, it would be prudent for the government to privatize IDBI and Yes Bank along with other PSBs where the government's mandate is to bring its stake to 25% - in line with SEBI's directive.

Sector Focus

RBI data suggests credit growth to industry remains sluggish at 8.9%y/y in May 2024. An improved incentive schemes for PLI sectors, higher government focus (infra and SME) and expansion of eligibility for rural and urban housing under PMAY could remain supportive of overall growth in this segment.

Tax Relief

Deposit growth has remained weak (14%) as against the credit growth (20%), resulting in funding shortfall. Additionally, slowing consumption growth, due to higher RWA on retail unsecured loan is a drag. As such, any incentive for consumers such as higher limit on loan interest waiver (from current INR2 Lac) and interest earned on deposit (from current INR 10,000 per annum) could be supportive of consumption and drive growth.

Pre-Budget Expectations For Defence Sector

India's defence allocation has been declining and stood at 15.2% of revenue receipts or 1.4% of GDP in FY25 (vs. 20.8% in FY21; 1.7%). Regardless, the NIFTY India Defence Index has grown at a CAGR of 183% and 64% as over past 1 and three year, respectively (data as of 10 July 2024) reflecting higher government focus on domestic defence manufacturing.

Given the strategic importance of sector and government's mandate to localize defence manufacturing and procurement, we believe the budget should move close to 2% of GDP, with focus on following themes:

Higher capital acquisition budget

Allocation for purchasing new equipment and technology will continue to improve and should increase to ~30-35% of defence budget (vs. 27% now). Additionally, incentives towards R&D for niche technologies could be a big boost for the defence ecosystem in India.

Special package for shipping

The increasing importance of maritime sector for both defence and civilian usage we would expect to see higher allocation towards shipping and waterways, specifically towards port development, ship manufacturing and maintenance.

Production & Exports

The continued focus and incentives for Atmanirbhar Bharat has helped a 60% rise in domestic production of defence to INR1.27tn in FY24 compared to FY20. However, to meet the Ministry of Defence's target of INR3tn by FY29, capital acquisition budget should grow by 20%-25% per annum starting FY25.

MoD has set an ambitious target of defence export of INR500bn by FY29 (INR211bn in FY24). To meet the target, we would expect continued reforms like IDEX for promoting the defence R&D ecosystem and streamlining export licensing procedures.

Pre-Budget Expectations For Railway Sector

The Union Budget 2024 is expected to go big on infrastructure spending, with an increase in allocation for railways as well. The focus will continue safety, travel quality, infrastructure improvement, ensuring faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight services. For these, the budgetary allocation has increased to INR2.55tn for FY25, up from INR2.40tn in FY24. The key focus area for the sector would be:

Safety and efficiency

The deployment of Kavach system on 44,000kms of track could be expedited and see higher allocation (vs. current allocation of INR5.6bn).

Additionally, the usage of technology to improve warehouse design, make supply chain efficient, passenger traffic management and inventory management could remain in focus in the budget.

Improving passenger travel quality

Allocation of capex towards improved travel experience through upgraded coaches (initial plan of upgrading 40,000 bogies), improved sanitation facilities and safety will continue to be a priority in the budget as passengers continue to prioritize comfort vs. cost.

Metro & High-Speed Rail

Budgetary support for developing and extending metro rails in existing and new locations along with development of high-speed rail network like Mumbai-Ahmedabad and allocation toward Rapid Rail Transport System would help in urban transformation.

Policy support

The central government shall announce production-linked incentive (PLI) scheme, to boost the production of railway ancillary parts and railway R&D spending in India. This should be positive for the domestic companies such as Rail Vikas Nigam Ltd., Texmaco rail & Engineering Ltd., RailTel Corporation among other.