Consumption theme could underperform as Budget 2022 goes big on infra

Higher inflation and cost of capital remain key worries amid expansion

The lack of negative surprises, the ongoing focus on spending-led growth and modest fiscal consolidation in the Union Budget was welcomed by the markets. Benchmark indices were up about 1.5 per cent in trade as the Finance Minister stuck to the capex led-growth script while giving populist sops the wide berth. While some sections of the market were also expecting measures to boost demand via the consumption route, the FM refrained from tinkering with the individual tax rates or the housing-related sops.  

Like last year, the Budget’s core focus was infrastructure with capex investments up 35.4 per cent y-o-y to record levels of 7.5 lakh crore for FY23. In addition to the incremental expansion in the road network, the government is also looking at setting up multi-modal logistics parks in partnership with the private sector, invest in 100 cargo terminals, improve inter-city rail connectivity and enhance investments in clean water supply to rural households.

Given that the states account for two thirds of the capex, the government move to allocate Rs 1 lakh crore as 50-year interest free loans is expected to spur investments at the state level. While private capex is yet to pick up, it is expected to follow the government spending across sectors. The production linked incentive scheme for 14 sectors is also expected to boost indigenous manufacturing while improving the employment situation. What should support the spending are the buoyant tax collections with goods and services tax hitting record levels of Rs 1.40 trillion in January.
 

While infra was in focus, the brokerages and industry leaders point out that stressed segments, be it in the services (contact sectors) such as hospitality and smaller businesses were left out. Says Mihir Vora, Senior Director & Chief Investment Officer, Max Life Insurance, “.....More needs to be done for the stressed segments viz. rural incomes, urban unemployment and the MSME enterprises. There was also hope of more sops for housing and real estate which are good job-creating sectors. Thus, there is a lack of stimulus for revival of a strong consumption cycle.”

This could lead to investors shifting to capex-heavy and allied sectors with some evidence of the same visible in trade as real estate, capital goods and cement stocks saw a rally.
 

The flip side to the singular investment focus, according to analysts at CLSA, is that the consumption side was left wanting. Higher yields and lack of demand focus may further reduce attractiveness of equities vs bonds and may accelerate sector rotation from more expensive consumption and IT space to the investment focussed and less expensive banks, infrastructure and commodities, they add.

While there are multiple positives, the street will be wary of elevated borrowing at a time of multiple macro headwinds. The gross borrowing for FY23 at Rs 14.95 trillion is higher than the Rs 13.6 trillion that the Street was working with.  This led to the spike in yields; no mention of the removal of capital gains tax and withholding tax and India's inclusion in the international bond index did not help either.

What could worsen the situation are rising commodity costs especially crude oil prices which are trading at elevated levels. Says Prabhat Awasthi - Managing Director & Country Head, India at Nomura, “Given India’s heightened trade deficit and a strong push in borrowing, the macro risks from a global tightening cycle would be a key concern and needs to be watched carefully.” Rising margin pressures was evident in the December quarter results of corporate India and this, coupled with upward bias on interest rates could be pressure points going ahead.