Capex proposals can be inflationary; equity, bond markets may not like it

The best part of the budget proposals has been the continuity in managing the fiscal situation and focus on capex spending without any negative surprises, says Andrew Holland.

On the positive side, the one overriding factor is that the Budget 2022 is a continuation of what the Finance Minister did last year in terms of capex. That apart, there are no real surprises as regards rejigging tax slabs or anything that can upset the stock market. The government is trying to achieve bigger goals over the years. As expected, there has been a focus on roads, railways, infrastructure and new-age Industries.

On the negative side, the huge capex proposals can be inflationary in the short-term, which the equity and bond markets may not like. Indeed, bond yields may jump up to 7 per cent. The budget also needs to be viewed in terms of what is happening globally – sooner-than-expected hike by the US Federal Reserve (US Fed), oil prices etc. The US central bank has been more hawkish than expected and this can put additional pressure.

Prior to the budget the market had expected a lot of money to come in through the bond markets this coming year. The budget was expected   to provide tax exemptions for settlement of Indian bonds on Euroclear, but remained silent on this and as a result there are doubts about India’s inclusion in the bond market index. Without these inflows into the bond market the rupee may come under pressure as well going ahead. So for the markets, it could double whammy as the interest rates are set to harden and the rupee, too, may be under pressure.

Given how the capital markets have played out over the past few year, the divestment target for financial year 2022-23 (FY23) should have been better. That said, if the global markets come under pressure, the heat will also be felt back home. So in that light, the divestment target for FY23 seems reasonable.

As regards taxation of digital assets, the positive takeaway here is that the government has not imposed a blanket ban. Cryptocurrency / bitcoin, non-fungible tokens (NFTs) etc. are now proposed to be taxed at 30 per cent instead of extending a blanket ban on them

Once the budget-related euphoria settles, the markets will turn to global developments for cues. As regards domestic factors, the budget has set the trajectory for higher growth over the next few years, which augurs well for both India Inc earnings growth and markets. The one thing that can dampen the spirits are the rising interest rates globally and the possibility of a hike in rates back home. Capital goods, materials and infra-related themes that were the focus of the budget will do well going ahead. That said, given the capex spend has been across sectors, the execution of the projects and utilization of the money effectively becomes essential.

For me, the best part of the budget proposals has been the continuity in managing the fiscal situation and focus on capex spending without any negative surprises. Over the years, the budget has become less important for the markets and this year has been no different.

(Andrew Holland is CEO, Avendus Capital Alternate Strategies. Views expressed here are his own. As told to Puneet Wadhwa)