Expectations on the budget were a bit muted amid fears of an increase in taxation to meet the high fiscal deficit and hope that the government is able to provide some resources to help the current GDP recovery. What we got today was a budget that delivered a big surprise, and how!
The first key takeaway is that the government, after a long time, has taken a bold gambit in the budget with a big focus on growth without any increase in taxation. Growth in India was slowing down even before the Covid-19 pandemic and then, of course, collapsed with the lockdown. Over the past 6 months, we have seen a recovery in the growth outlook. The Finance Minister has done a lot to sustain this recovery process with a thrust on infrastructure and reforms.
The focus of driving growth is on infrastructure and domestic manufacturing. Firstly, the Finance Minister has directly increased capital expenditure in the budget by a massive 26 per cent over the revised capital expenditure of FY21 (which was higher than the budgeted number). Secondly, the Finance Minister has focused on the financing of infrastructure and we are now going to set up a Development Finance Institution again. Lastly, there is a focus on monetizing existing assets by the way of InVit to provide greater funds for future growth.
The second key takeaway is on reforms. The budget has spoken of a “bad bank”, details of which will be announced soon. Secondly, there is an increase in the FDI limit in insurance to 74 per cent. But the most significant announcement is the laying out of a roadmap to privatize the public sector companies as against the “disinvestment” we were focusing on so far. Here the announcement to privatize two public sector banks is reflecting a huge change in mindset.
The third takeaway is the continuing move to simplify the taxation structure and bring more transparency for the taxpayer. Here the changes in re-opening of tax assessments to only 3 years from 6 years is a major move to reduce tax litigation and boost taxpayer confidence. Of course, the promise of a stable tax regime was met by no tax increase in such a difficult year.
So where is the risk? First, of course, with any budget, it is the implementation. We see the budget as laying out a roadmap for multi-years of growth and the onus now shifts to carrying out these measures. The second risk is the high fiscal deficit estimate of 6.8 per cent for FY22 on top of a higher than expected 9.5 per cent estimated deficit for FY21. We think this is a risk worth taking to get the economy humming again. The RBI will now need to ensure the government borrowing program without putting too much pressure on bond yields. The good thing, we believe, is that the revenue assumptions are fairly credible. With the economy likely to grow at a nominal growth of between 15-16 per cent, the tax revenue increase of 16.7 per cent appears fairly achievable. Also, if we can get the IPO of LIC in FY22, the disinvestment target of Rs 1,75,000 crore will be achieved.
In terms of the markets, we see some consolidation in the bond markets with a possible higher government borrowing program. For the equity markets, a growth-oriented budget is an elixir. The infrastructure thrust of this budget will ensure that we may finally see a pick-up in the capex cycle and thus ensure a strong GDP growth for the next few years. Earnings have been a disappointment past few years. Our view is that a revival in the economy can lead to earnings doubling over the next few years and drive equity returns.
Secondly, our view was that was consumer stocks had become very expensive and that it was time for cyclical value stocks to take over the mantle of stock market leadership. We think the budget has provided a thrust to this with infrastructure being a key part of the growth outlook for the next few years. So, we look for healthy stock market returns, led by earnings rather than re-rating of valuations and led by cyclical stocks rather than consumer plays.
(Jyotivardhan Jaipuria is the founder of Valentis Advisors. Views expressed are personal.)