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A dream budget…

It is a radical budget, providing all the aspects of social benefits, reforms and growth in the economy, without an increase in direct tax. Introduction of cess is not expected to increase inflation, due to reduction in basic custom duty. Possible hike in public debt is noticeable, however, it does provide incentive to generate more wealth in the economy.

* The budget forecast domestic GDP to grow at 14.4% in FY22 supported by higher government spending.

* The govt. is taking the vital burden of reviving the economy by spending 34.5% more capex, assuming low private expenditure during pandemic.

* This extra spending will be supported by Agri-Infra Cess and extra borrowing from the debt market, without a direct burden on household & private sector.

* The key beneficiary will be Banking industry including PSBs, Insurance and cyclical sectors like Infra, Cement and Construction.

* The only concern from the growth plan is that inflation and interest cost can increase in the future, which may impact private investment & real growth.

* The budget will provide buoyancy for the equity market & corporates, adding more avenues for growth without additional taxes. The broad risk for the equity market is high valuation and global trend, which recently witnessed high volatility.

Social, Reform and Growth measures...

The budget provided all the dimension of social responsibilities, reform and growth. Vaccination, Healthcare & AtmaNirbhar scheme is provided in FY22 with flexibility to add more traction, as required in the future. Key reforms included are increase in FDI limit in insurance, privatisation of two PSUB and big divestment plan. Growth comes from high government spending and measures to develop India as an export hub.

Introduction of cess…

for extra tax revenue Agri-Infra cess has been introduced to address high social and growth expenditure, to improve the infrastructure of Indian agriculture sector, and to reduce the high food-grain inflation in the long-term, For petrol it is at Rs. 2.5 and Rs. 4 for diesel, per litre. For gold and silver 2.5% and at varied rates on specified imported goods. The food inflation is India has been very rigid, during low demand period too, like Covid-19.

Can lead to moderate inflation..

.but no increase in direct tax is a boom New cess, borrowing and expenditure can lead to hike in inflation in the short-term, but better Agri-Infra in the long-term will bring food inflation under control. Implementation of Agri reforms can have extra help. In spite of this short-term limitation, no increase in direct tax and high government spending will generate extra growth in the economy, which is the main benefit to the economy & equity market.

What could be the risk in the market...

Given the impetus on growth, during weakening fiscal & global position, the money will come from borrowings, which can add risk. The public debt in the economy will increase with higher printing of money by RBI, which can impact sovereign rating and interest rate in the system.

Key beneficiary sectors...

* Banks: Privatization of PSBs will make the banking sector more lucrative while development of Asset Restructure Company will reduce NPA concerns.

* Insurance: More investment can be expected from foreign players leading to re-rating of the industry.

* Infrastructure: Construction, Cement, Real Estate and Metals will be the key beneficiaries.

Market View…

The budget has provided more to the economy than what the market has anticipated. This will certainly provide a boom to the market in which cyclical sectors like Banks, Infrastructure and Metals will be the key beneficiaries. The point of concern is that valuations is at new peak levels, which can limit future momentum. Any discrepancy in the global market and domestic debt market are the watch list in the medium-term.

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