The government has effectively used the backdrop of the massive economic disruption due to the pandemic, to re-organize the Budget as well as its economic priorities along with it. In a growth-constrained world, India has gone down the path of putting in place the building blocks which are required for accelerating its growth agenda. For the past 6-7 years, India’s extreme focus on controlling the fiscal has had the deleterious outcome of constraining growth, visible in the deceleration of GDP during the same period. We sincerely believe that growth is the ultimate panacea for many of India’s problems, and the Union Budget 2021 has chosen to prioritize the same while pushing fiscal considerations to the background, at least for some time. We think the Budget has the ingredients to ignite a fresh investment cycle which has eluded the economy for many years and gives India a chance to regain its growth momentum.
At an aggregate level, the Budget 1) improves the quality of the spending by focusing on infrastructure thus giving it a growth push. Overall capital expenditure has been raised by 26 per cent over FY21 and nearly 65 per cent over FY20 levels in roads, railways and urban infrastructure, 2) allows for a more gradual glide path to fiscal consolidation and 3) enhances the quality of the fiscal math by subsuming extra-budgetary allocations to reflect reality as it is and 4) continues to pursue the disinvestment agenda in 2021 and at the margin even ups the ante by enlarging its scope to include two more banks and one general insurance company as well. While the pandemic did dislocate the process in 2020, stronger execution should enable the govt to move closer to the target in 2021. The Budget also needs to be commended for eschewing the urge to tinker personal or capital market related taxation.
Additionally, there are measures to make the financial sector more robust, including a new development financial institution, an asset reconstruction company, an institution to infuse liquidity into the corporate bond market, a new security market code, higher FDI limit for the insurance sector and liquidity for depositors in banks under duress. While the budget does project a higher than expected fiscal deficit of 9.5 per cent and 6.8 per cent for FY21/22, we reckon this should be overlooked both by equity and debt market investors, should it improve India’s growth trajectory and boost corporate earnings in the process.
Armed with this growth-oriented budget, we visualize the economic picture of 2021 for India witnessing a comeback of credit growth after nearly 3 years of deceleration, modest pickup in core inflation but consistent with the overall economic recovery. As global economic recovery also takes hold with the roll-out of the vaccine, we expect a style reset in global investing with growth/momentum yielding to value/mean reversion trades in 2021. With a Govt agenda which is lot more growth supportive, this sentiment should rub off on India too thereby favoring financials and industrials/cyclicals.
(Taher Badshah, CIO – Equities, Invesco Mutual Fund. Views expressed are personal)