Tag - Fiscal deficit

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.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Budget 2021: Promising but ambitious one!

The Budget 2021, a highly unique one due to the pandemic, provided the confidence to the investors as witnessed by Nifty50, which closed the day 4.7% higher at 14,281. First do no harm or “primum non nocere”, is a doctrine as old as medicine itself. The Finance Minister adopted this approach to capital markets, taxation and the results are there for all to see. Investors were expecting harsh revenue raising measures as epidemic related expenses mounted while revenues shrank. Finance minister presented an expansionary budget without significant increase in taxation.

Following are the key highlights from the budget 2021;

  • The nominal growth rate target has been set at 14.4% for FY22 as against 10% in FY21.
  • The estimated fiscal deficit stands at 9.5% in FY21 vs 3.5% as per the previous estimate. The deficit is expected to be 6.8% for FY22.
  • India FY21 Gross Tax revenue estimate said to be reduced by about Rs 5 lakh crore. The Government is estimating FY22 expenditure at about Rs 35 lakh crore.
  • A sharp increase in capital expenditure on the infrastructure segment- Rs 5.54 lakh crore, 34% higher than the budget estimate of FY21.
  • Announcing its version of a bad bank, the Government will set up an asset reconstruction and management company to take over the bad loans. A bad bank will act as an aggregator of all stressed assets in the system. It is set up to buy the bad loans and other illiquid holdings of another financial institution.
  • Reducing customs duty uniformly to 7.5% on semi, flat and long products of non-alloy, alloy and stainless steel. Exempting duty on steel scrap till March 2022. To provide relief to copper recyclers, reducing duty on copper scrap from 5% to 2.5%.
  • Raising customs duty on some auto parts to 15%, on cotton from 0% to 10%, on raw silk and silk yarn from 10% to 15%.
  • Set aside Rs 15,700 crore for medium and small enterprises in FY22, double of what was budgeted in the FY21.
  • The central government aims to garner Rs 1.75 lakh crore through divestments in FY22. In FY21, the government had budgeted to raise Rs 2.1 lakh crore through divestments but managed to achieve only Rs 50,304 crore. The central government will further incentivize states to divest assets.
  • Provide Rs 20,000 crore in FY22 for re-capitalization of public sector banks.
  • Proposed to increase the permissible limit for Foreign Direct Investment for insurance companies to 74% from 49% along with allowing foreign ownership and control with safeguards.
  • The much-awaited voluntary vehicle scrappage policy is claimed to be bringing Rs 43,000 crore business opportunity by boosting consumption in the auto industry and helping the environment. Vehicles would undergo fitness tests in automated fitness centers after 20 years in case of personal vehicles, and after 15 years in case of commercial vehicles.
  • To further augment road infrastructure, more economic corridors are being planned. 3,500 km of national highway works in Tamil Nadu, investment of Rs 1.03 lakh crore 1,100 km of national highway works in Kerala, investment of Rs 65,000 crore 675 km of highway works in West Bengal, cost of Rs 25,000 crore.
  • The imposition of Agriculture, Infrastructure & Development Cess on the following items after reducing customs duty is expected to fund infrastructure for agriculture.
Items Revised basic customs duty rates
Apple 15%
Alcoholic beverages falling in chapter 22 50%
Crude edible oil (Palm, Soyabean, Sunflower) 15%
Coal, lignite, peat 1%
Specified fertilizers (Urea, MoP, DAP) 0%
Ammonium Nitrate 2.5%
Peas, Kabuli chana, Bengal gram, Lentils 10%
  • Government sets agriculture credit target of Rs 16.5 lakh crore for FY22 to increase provision to a rural infra development fund to Rs 40,000 crore from Rs 30,000 crore. Five major fishing harbours to be developed as hubs for economic activity.
  • Proposed an outlay of Rs 2.23 lakh crore towards the healthcare sector, 137% higher than Rs 94,452 crore projected in FY21. The spending will include a new centrally sponsored scheme, the PM Atmanirbhar Swasth Bharat Yojana, to strengthen the health infrastructure of the country. The government plans to spend Rs 64,180 crore on the scheme spanning over six years.
  • The Government will rationalize customs duty on gold & silver. The gold currently attracts an import duty of 12.5% which has been reduced to 7.5% and Agriculture, Infrastructure & Development Cess of 2.5% is imposed.

Impact of the budget announcement on the sectors

  • The formation of the bad bank will help the banks to liquidate its non-performing loans in a comparatively easier way. The banking industry is expected to benefit out of it.
  • The Government is expected to provide higher recapitalisation to the Public Sector Undertaking (PSU) banks. This will aid in providing relief from capital erosion due to the COVID impact.
  • The vehicle scrappage policy, although a voluntary one, is expected to provide tailwinds in the auto industry, especially the Commercial Vehicles segment. The tractor and two-wheeler makers expect increased allocation towards the rural economy.
  • The increased spending on the healthcare sector is expected to provide opportunities for the growth of the industry. The healthcare infrastructure is expected to improve as a result of increasing spending towards the sector.

 Investment Strategy

  • With the Government’s approach to have an expansionary budget, investors will be focusing more on winners like cyclical players instead of focusing on safety net stocks like those belonging to Pharma and Consumer sectors.
  • We believe that the mid-cap stocks will be a late-cycle story with the focus on the expansionary budget. We have already recommended quality mid-caps in the past and we will continue to spot opportunities in the mid-caps space as and when they arise.

We will be watching the execution of the budget very closely as any deviation from the expected performance, especially the receipts side, which can affect the interest rates meaningfully.