Authored by Rajesh Cheruvu
Making promises and building hopes is a path often taken by policymakers only to fail miserably later, but the Finance Minister has passed with flying colors. Historic times called for historic actions and she has delivered a ‘budget like never before'.
An unwavering focus on growth and next-generation reforms would be the hallmarks of this budget. It also reinforced the over-the-years paradigm shift in the government’s attitude towards systemic reforms and ease of doing business. Now that the proposals have been laid bare, the ball moves to the court of execution wherein success will guarantee a much powerful economic destiny.
The budget provided a much-awaited boost to capital spending by channelizing the government's resources towards building infrastructure and capacity, paving a path to a secular economic recovery, and creating jobs. The FY22 nominal GDP growth is now projected at 14.4 percent YoY, offsetting much of the FY21 decline. The consequent fiscal glide path has also been pushed into the future by a few years as recovery from recession takes CenterStage.
Return of growth has a positive multiplier effect on business sentiments, consumer confidence, employment and tax buoyancy which will eventually push the fiscal deficit into a prudent zone by FY25-26. ‘No change’ in tax rates has been a welcome change as increased spends are being met without increasing direct taxes, thus, providing relief to the common man.
The pandemic has led the government to frame a holistic approach towards public healthcare with curative, wellbeing and nutrition aspects being covered. The FY22 outlay has been more than doubled YoY basis even as expenditure had risen from 1.5 percent (FY20RE) to 1.8 percent of GDP in FY21BE. Urban Swachh Bharat Mission has also been provided with an outlay of Rs 1.42 trillion over 5 years.
The Rs 100 trillion National Infrastructure Pipeline (NIP) has been expanded to 7400 projects with more than 50 percent allocation towards Energy, Roads and Urban development sectors. The National Rail Plan aims at developing a ‘future ready’ rail system by 2030 to cater to the projected traffic requirements up to 2050.
Several urban infra projects have been identified like universal water supply in all urban local bodies, remedying air pollution in 42 urban centres, voluntary vehicle scrapping policy, innovative PPP models to augment public bus transport and 2 new Metro technologies for Tier-2 and Tier-1 cities. Tax benefits for Affordable Housing developers and buyers have been extended till 31-Mar-22. Finally, a Development Finance Institution (DFI) has been proposed to be set-up with an initial capital of Rs 200 billion with an ambition to have a lending portfolio of Rs 5 trillion over 3 years. Debt financing of InvITs and REITs by FPIs will also be enabled thus easing access to finance.
An Asset Reconstruction Company and Asset Management Company have been proposed to be set-up to address the systemic bad loan problems. This should progressively ease stressed asset concerns for banks and lead to a healthy recovery in credit growth.
Rs 200 billion recapitalization of PSU banks has also been planned. 2 PSU Banks and 1 PSU General Insurance company are proposed to be privatized in FY22 in addition to the planned strategic disinvestments of BPCL, Air India, SCIL, Concor, IDBI Bank, BEML, etc. and the LIC IPO.
Monetizing operating public infrastructure assets is a very important financing option for new infrastructure construction. A “National Monetization Pipeline” of potential brownfield infrastructure assets will be launched that will include toll roads, transmission lines, oil and gas pipelines, airports, rail infra-assets, warehousing assets, and sports stadiums. Permissible FDI limit in Insurance companies is also proposed to be increased from 49 percent to 74 percent to allow foreign ownership and control with safeguards.
Amongst asset classes, Equities grabbed pole position in terms of acknowledging the Budget with the NIFTY50 rallying ~4.6 percent after multiple depressed days leading to the budget. The rupee slightly weakened vs. the USD since the FM commenced her Budget speech as bears of the rupee likely believe that the total stimulus provided by India, remains several notches below that of many developed economies. Despite that, India’s yield curve steepened ~10-15 bps and the G-Secs reflected the Budget’s expansionary approach.
The Auto, infrastructure, CGD, Insurance and banking sectors were bolstered by the various reforms doled out in the budget and equity as an asset class is still strong owing to expected earnings recovery given the low base effect combined with the pick-up led by pent-up demand and healthy rural economy. Valuations though appear to be expensive both on a trailing and 1/2 years forward basis, however, one must keep in mind that the compressed historic earnings have led to exorbitant trailing PE multiples and that the asset class is expensive across the globe.
While investors could find opportunities among the themes like PLI and infrastructure that are likely to outperform over the next 6-12 months, the markets have overlooked certain segments over the past few years due to change in macro fundamentals, which are now offering value and are relatively priced at a discount. However, investors are advised to maintain their discipline of holding on to their core allocations built on their inherent suitability and should stick to staggered allocations. Core allocations will continue to deliver their due over the medium-longer term, while the thematic opportunities could help investors see some gains in the intermediate-term.
In terms of fixed income, although the G-Sec yields went up post the budget speech, concerns on growth, inflation & fiscal deficit could continue to weigh on sovereign bond yields despite RBI support. Investors should focus on top quality corporate issuances/funds and short duration investments in debt portfolios.
Global easy monetary conditions and the potential tax changes in the US could keep the US dollar under pressure. This combined with recent softness in yellow metal could bring back consumer demand and Gold could still have room to inch-up in the short-medium term as it continues to be a hedge against market risks in investor portfolios.
Rajesh Cheruvu is CIO at Validus Wealth. Views expressed are personal