February 2021 is special to us in all respects. It completes one year of operations for Pranitya Wealth and also it has also welcomed the Union Budget 2021 which was a breath of fresh air to a pandemic struck economy. While concerns go on regarding a second COVID wave in Europe and the US, India has been fortunate to avert this wave and look at a strong recovery. The Union Budget came as a sweet surprise where the finance minister achieved everything without giving away anything and creating a beautiful mind game. She proved a point as to how simple things can be. We feel that the seeds of such a structured Budget were sowed in the last budget itself where they did everything required to structurally align matters and made the base strong for the current budget.
Below captures a quick glimpse of the key numbers from the Budget and the Economic Survey:
• The size of the Indian Economy as measured by the Gross Domestic Product (‘GDP’) was expected to contract by 7.7% in FY 2020-21 but the economic survey expects the Indian Economy to grow by 11.1% in real terms (adjusted for inflation) during 2021-22 on this low base;
• The fiscal deficit has been pegged at 9.5% of the GDP in FY 2021-22 which has been higher than expected by most economists – who however, have lauded the Government for coming out with cleaner numbers as compared to past budgets;
• The next parameter was the gross tax revenue receipts which has been kept at Rs. 22,17,059 crore in FY 2021-22 representing a growth of 16.7% over 2020-21. These estimates roughly indicate that an increase in GDP by 10% could result in an increase in a tax revenue by 11.6%;
• The Government has resorted to the capex route to spur economic growth with a sharp increase in capital expenditure to Rs. 5.4 trillion which is 34.5% more than the budget estimate of FY 2020-21. Of these, Rs. 44,000 crores will be spent on projects and programs that show good progress and are in need of further funds;
• Not only has the finance minister taken the responsibility of government spending, but has also indicated that a comeback of the traditional brick and mortar sectors – infrastructure, metals and cement and allied manufacturing pockets – is on the cards.
• The government has hinted heavily on divestment of PSUs in this budget – the privatization of 2 public sector banks along with the announcement to set up an ARC and AMC for resolving the issue of stressed assets do seem like steps in the right direction but execution remains key. Unlike previous years the divestment target seems realistic at Rs. 1.75 trillion.
• And last but not the least – the Government plans to undertake roughly Rs. 12 Lakh Crore borrowings from the market this year – which is similar to the borrowings undertaken in FY 2020-21.
The FM preferred to stay away from bookish items. In the times of crisis, Government spending is the only option when the private sector suffered a lot in the last year. When you spend more on capital expenditure, it naturally creates a multiplier effect
across the entire economy. This explains why the Government decided to spend more on the infra side. The pandemic warranted an allocation for the healthcare sector as well, and this budget well lived up to the hype. The budget provided a sizeable Rs. 35,000 crore for the vaccination for COVID-19 and besides this, there has been a decent jump in the
health spend to serve the population in the best possible manner. Our next section of the budget focusses on what the budget means for the equity and debt market.
The fixed income space is becoming increasingly complex. The proposed Government borrowing program of Rs. 9 Lakh Crores (net) has sent jitters to the bond market, where the yield has shot up by 2.5% on the budget day itself. The 10-year G-SEC has
moved from 5.90% to 6.12%. Looking at the current trend of tax collections (with greater compliance) and improved corporate earnings, it is expected that the additional borrowing target canbe met without any challenges. With greater tax collections, on the GST front as well we feel borrowing may not crowd out private players.
Further, we expect that the additional borrowings could be deployed on the capex front which could result in inflations, albeit with some lag. We expect that the Challenging times ahead 3 inflation will not shoot up immediately but remain at around 5% throughout FY 2021- 22.
Following were the trends in the inflation in the last months of 2020:
Month WPI CPI Food Inflation
December 1.22% 4.59% 3.41%
November 1.55% 6.93% 4.27%
The Government’s announcement of forming an institution that will buy and sell corporate bonds is likely to stimulate and deepen the secondary market. Divestment of BPCL, Air India, IDBI along with LIC is on the line e so that may not put additional pressure on the Government for additional borrowing.
Though the budget has some inflationary effects, so we expect 10-year G-SEC to remain at elevated levels of 6% to 6.5% as a broad range in the next fiscal. On the side liquidity, RBI is expected to phase out the excess liquidity in the system without distorting the yield curve to a great extent.
We have seen the best rally post any budget of over 5%. The Market had approached the budget with a lot of caution and skepticism. What the economy wanted was huge Government spending in banking, insurance and that too without any rate hike. An eye on the divestment side has proved that the targets look realistic due the proposed LIC IPO. The Government had already lowered the corporate tax rate in the last budget so a further reduction in taxes seemed unlikely. On this backdrop, the Economy is more likely to remain in the pink of its health and India Inc will be able to attract foreign funds hand in hand with Atmanirbhar Bharat and the PLI Scheme.
Corporate earnings for Q3 exceeded expectations and it was good to see the mid cap and small cap companies reporting encouraging results. Most of the profits for India Inc has come from savings in cost, lower tax rates and the lower interest rates. With this budget, we also expect top line will start improving for in the year FY 2021-22.
What’s next for the bulls and bears?
With these improved financials, we expect equities to do well and perform in line with growth expectations. We prefer not to predict any levels but we were never negative in the last ten months since March 20. Impact of budget on each sector will be offered soon and we will do it through our series of experts interacting with you every two months.
Looking ahead, Q4 earnings are expected to be not very superior to Q3 earnings as most of the consumer sector saw little slowdown. Further, it is a known fact that for most industries Q3 is usually the best quarter for many industries. We expect a broad-based rally over a period of time and the markets could consolidate post the feel-good factor of the budget before going up and hence one needs to keep an eye out for the Q4 returns.
We also expect that the global economies should have a supportive stance since the current second wave of COVID in some parts of the world can prove to be more challenging. Supportive global cues could benefit the Indian markets going forward. All in all, we recommend that the long-term investor stay invested to enjoy any forthcoming rally in the markets.
Nifty will reclaim 15,000 soon and one can stay invested in equities comfortably going ahead. The stock specific approach will be the only change in our strategy and thus we are identifying best managers to do it. We have short listed White Oak already and will add soon a few more PMS Managers in our product basket besides mutual funds.
We hope you found our insights useful!
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