Government’s focus on infra to invigorate strength of the economy
A key goal of the budget CY22 is in the execution of the Capex plan and crowding in private investment. The budget aims to stimulate the economy by beefing up public investments, creating demand for industrial inputs like cement, steel, and capital goods, and generating jobs. Finance minister Nirmala Sitharaman prioritized growth over fiscal reduction, increasing capital and infrastructure investment. In FY23, capital spending accounts for about 85% of the budget. The fiscal deficit target for FY23 has been set at 6.4 percent, a modest decrease from 6.9 percent in FY22.
The budget proposes a 35.4% increase in Capex, a 15% expansion of the national highways network with the addition of 25,000 km of roads, the development of four multimodal logistics parks in the coming year, a focus on electric vehicle (EV) charging infrastructure, and a new battery swapping policy. It also suggested a 7.5% customs tax decrease for all project capital goods imports over time, as well as a budget commitment of Rs 19.5 bn for the production-linked incentive (PLI) plan for polysilicon solar module manufacturing. The divestment target is reasonable at Rs. 68 bn in FY23, down from Rs. 78 bn in FY22. The initial public offering (IPO) of LIC, which is expected in March 2022, will meet this divestment goal. The government intends to sell a 5% stake in the company to raise Rs. 75 bn, with considerable demand, predicted from both retail and institutional investors. LIC IPO is not only expected to facilitate the huge influx of retail investors into the Indian equity markets but also expected to reduce the money flows in different sectors.
The FED’s liquidity normalization initiative has gained traction and market interest rates have risen as a result of this. This is projected to normalize the returns from different asset classes, including equities. The Indian equity market saw exit by the foreign institutional investors in the last few months, mainly because the US has entered a phase of aggressive liquidity normalization and rising interest rates. It is the high rate of economic growth and the accompanying high level of inflation that has led to the policy modifications in the US. However, the government’s private investment policy encounters a significant hurdle a massive tightening of borrowing costs in the economy. The expectation was that the RBI will keep its accommodative policy stance until the economy is fully recovered. With the budget announcement, however, the RBI is expected to hike its policy rates.
As the liquidity reduces, financing large deficits becomes difficult in rising interest rates scenario which dampens the returns from equities. We believe that sectors such as defense (which has been allocated 13.3% of the total budget with a focus on indigenization), infrastructure, metals, cement, and ancillaries are expected to remain in the spotlight with a particular emphasis on firms with low PE multiples.
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