Budget 2024: Key Expectations from Banking, Defence and Railway Sectors

In the upcoming Union Budget 2024, focus is expected on the railway, defence and banking sectors which are crucial pillars of the Indian economy. Railway sector is likely to see investment to enhance infrastructure and improve services. Defence sector may receive increased funding to boost national security and support indigenous manufacturing. As for the banking industry which has shown growth and resilience since the major public sector bank mergers in 2020, budget is set to address several key areas.

These include boosting capital inflow to ensure financial stability, implementing measures to tackle non performing assets and advancing digital banking technologies. Additionally, support for micro, small and medium enterprises is expected to be a priority reflecting the government’s commitment to promote economic growth and financial inclusivity.

Upcoming Budget 2024 is anticipated to allocate around 2% of GDP to the defense sector reflecting its crucial role and the government's goal of boosting domestic defense production. This increase aligns with the government's broader initiative to advance the Make In India strategy which aims to strengthen local manufacturing and procurement of military equipment. The focus of the budget is on modernizing defense capabilities by raising investment in research and development. This approach is designed to foster innovation and ensure that India can meet its defense needs with home grown solutions.

In anticipation of the upcoming Union Budget 2024, capital expenditures are expected to be directed towards enhancing travel experiences includes introduction of a new Production Linked Incentive (PLI) scheme and increased financial support for expanding and improving metro rail systems. For the fiscal year 2025, the budget allocation for these projects has been increased to ₹2.55 trillion up from ₹2.40 trillion in FY24. According to experts, there are specific pre budget expectations for the banking, defense and railway sectors. These expectations are shaped by various themes and are anticipated to have a considerable impact on these industries.

Pre Budget Expectations For Banking Sector

India's banking sector has demonstrated growth and resilience particularly following the major public sector bank mergers in 2020. This trend is evident in the performance of  Nifty PSU Bank Index, which saw a remarkable return of around 88% in FY24, outpacing the 14% return of the Private Bank Index during the same period. Credit fundamentals of PSU banks have strengthened across all key metrics which is why the government has not allocated funds for bank recapitalization in the past two years. Current trend is expected to persist in this budget. Looking ahead primary focus for the banking sector will likely be on maintaining this positive trajectory and addressing any emerging challenges to sustain their strong performance.

With valuations of Public Sector Banks nearing all time highs, it may be a strategic move for the government to consider privatizing IDBI Bank, Yes Bank and potentially other PSBs aims to reduce its stake to 25% aligning with SEBI's regulations.

Current data from the RBI indicates that credit growth for industries is modest standing at 8.9% yoy as of May 2024. However, there are positive developments that could boost overall growth. Enhanced incentive schemes for sectors under Production Linked Incentive scheme, increased government emphasis on infrastructure and small to medium enterprises and the expansion of eligibility for rural and urban housing under Pradhan Mantri Awas Yojana might help support and stimulate growth in these areas.

On the other hand, deposit growth has been sluggish at 14% while credit growth has been stronger at 20% creating a funding shortfall. Additionally, weak consumption growth, partly due to higher risk weighted assets on retail unsecured loans is a concern. To address this incentives for consumers such as increasing the loan interest waiver limit currently at ₹2 lakh and the interest earned on deposits currently capped at ₹10,000 per annum could be beneficial.

Pre Budget Expectations For Defence Sector

India’s defence budget allocation has been declining standing at 15.2% of revenue receipts and 1.4% of GDP in FY25 compared to 20.8% and 1.7% in FY21. Despite this NIFTY India Defence Index has surged growing at a CAGR of 183% and 64% over the past one and three years respectively as of July 10, 2024. Reflects a stronger government emphasis on domestic defence manufacturing. Given the sector's strategic significance and the government's push for localizing defence production, it is anticipated that budget could rise to nearly 2% of GDP.

Key areas of focus might include increased funding for new equipment and technology with expectations for this to make up about 30-35% of the defence budget up from the current 27%. Boosting R&D for advanced technologies is also likely to play a critical role in enhancing the defence sector.

Maritime sector crucial for both defence and civilian purposes is expected to see greater investment particularly in port development, shipbuilding and maintenance.

Government’s push for self reliance has led to a 60% increase in domestic defence production reaching ₹1.27 trillion in FY24 compared to FY20. To achieve the Ministry of Defence’s target of ₹3 trillion by FY29 capital acquisition budget should grow by 20%-25% annually from FY25 onwards. Furthermore, with an ambitious export target of ₹500 billion by FY29 up from INR 211 billion in FY24 continued reforms such as IDEX initiative and streamlined export licensing are expected to further support the defence R&D ecosystem and export growth.

Pre Budget Expectations For Railway Sector

Union Budget 2024 is set to boost infrastructure spending with a notable increase in the allocation for railways. Budget for FY25 will rise to ₹2.55 trillion up from ₹2.40 trillion in FY24. Key areas of focus will include enhancing the passenger experience with upgraded coaches, improved sanitation and better safety measures. Upgrading 40,000 bogies is part of this initiative as comfort is increasingly prioritized over cost.

Budget will also support the expansion of metro rail networks in both existing and new locations as well as the development of high speed rail corridors like Mumbai Ahmedabad. Investments in Rapid Rail Transport Systems are expected to drive urban transformation.

Additionally, the central government plans to introduce a Production Linked Incentive scheme to boost the manufacturing of railway parts and promote research and development in the sector. This is anticipated to benefit domestic companies such as Rail Vikas Nigam, Texmaco Rail & Engineering and RailTel Corporation among others.