Five things the market will be watching in FM Sitharaman's third Budget

It has reacted negatively to her previous two budgets. This time too, it has come off over 5 per cent from the highs

Finance Minister Nirmala Sitharaman will present her third budget on Monday. The market has reacted negatively to the previous two budgets presented by her (fell 1.1 per cent in 2019 and 2.5 per cent in 2020). This time around also, the market has come off more than 5 per cent from the highs. Broking firm Bernstein in a client note has listed out five key areas that the FM will have to focus on to make it a market-friendly budget.

Equity taxation 

Sitharaman will be tempted to raises taxes levied on the capital market transactions. However, any such move could hurt centre’s disinvestment plans. “Government needs to raise resources to help increase spends but equity markets will consider any form of tax increases negative and cheer tax cuts,” says Bernstein adding that the government could look to set disinvestment target in excess of Rs 2 trillion. “The best way to raise resources this year is to accelerate divestments –equity markets are conducive enough to digest the divestments of even PSU stocks.”

 

Fiscal deficit 

Any FM strives to keep fiscal deficit under check. However, given the circumstances the government will have to loosen the purse strings. “FM needs to keep deficits higher even in FY22 and any attempts to rein in deficit below 4 per cent, at the cost of growth spends or by raising taxes could raise concerns on the sustenance of recovery,” the brokerage says.

Capex 

‘Capex’ has become the buzz-word ahead of the Union Budget. Bernstein believes the FM will have to up the ante on this upfront. “Government needs to peg a higher growth target for capex – around 30 per cent YoY for a meaningful impact…. Subsidies must be controlled, as they are now similar to capex in terms of GDP intensity – however elevated healthcare spends and need for support to the poor reduces flexibility.”

 

Private-spending boost

While the government will have to do the heavy lifting when it comes to the kick starting the investment cycle. Any push to stimulate private spending will be welcomed by the markets. “While there will be attempts to garner private funding in infra, policies should be created to help protect downside for private sector investments. We also expect the government to share a bit more on the PLI scheme announced earlier, although it has limited capex impact.”

Tackling NPAs

Loan growth for the banking system has slowed down considerably. A key for the economic revival will be higher credit offtake. Recapitalizing state-owned banks and addressing NPA woes will cheered by the market. “Bad bank concept has resurfaced – relevant, in our view, as it can accelerate decision making, as currently the administrative process with need for several approvals from various banks slows down the process of NPA resolution.”