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Looking beyond convention

* The policymakers have looked beyond convention to ensure that the effective fiscal stance does not become staunchly pro-cyclical ahead, while policy adherence to mediumterm fiscal sustainability is signaled. We reckon innovative financial sector reforms, better resource allocations, stable tax regime and fiscal funding by aggressive asset sales in the form of existing functional infrastructure monetization, reinstitution of the DFI model, core and strategic disinvestment, etc. as positive for medium-term growth potential. We remain OW on domestic-cyclicals (Banks and Autos), Building materials and Pharma.

* FY22BE GFD/GDP is pegged at 6.8% after a whopping slippage to 9.5% in FY21, implying net and gross borrowings of Rs9.25tn and Rs12.05tn respectively. Tax revenue assumptions are rather conservative and could surprise on the upside. The Rs1.7tn disinvestment target and mix of capital and revenue spending appear reasonable too.

* Capex-led stimulus over a consumption-focused stimulus is the focus, especially amid its larger multiplier effect on employment and growth. Centre’s capex-to-GDP ratio is budgeted to jump to 2.5%. Even as the Centre’s capex is likely to jump 26%yoy, total public Capex funding of direct fiscal and IEBR route may see a modest growth of 5%.

Fiscal consolidation amid shifting economic ideologies; Remain

OW on domestic cyclicals Policymakers have looked beyond convention to ensure that an effective fiscal stance does not become pro-cyclical ahead, while policy adherence to medium-term fiscal sustainability is signaled. Key steps such as 1) Innovative financial sector reforms; 2) better resource allocation; 3) stable tax regime and economic certainty; and 4) possible fiscal funding by aggressive asset sales in the form of existing functional infrastructure monetization, disinvestment and strategic sale – will contribute to better growth potential in the medium term. The reinstitution of the modified DFI model to fund the infrastructure pipeline is a significant step. New financial sector initiatives, such as recapitalization, ARC-led resolution and PSU bank divestment, should improve the efficacy of financial sector’s ability to better fund the recovery. Overall a healthy fiscal impulse is led by: 1) a high expenditure/GDP ratio of 15.6%; and 2) front-loaded investmentfocused stimulus over a consumption-focused stimulus be given, especially amid the higher growth and job multiplier effect, especially in cyclical downturns. Overall, there is a huge shift in the narrative backed by numbers, intent and political capital. We remain OW on domestic-cyclicals (Banks and Autos), Building materials and Pharma.

FY22BE GFD/GDP to consolidate at 6.8% after 9.5% in FY21; Conservative revenue assumptions

Central GFD/GDP has been pegged at 6.8% of GDP in FY22BE after a sharp slippage in FY21 GFD/GDP to 9.5% of GDP amid the inclusion of past FCI and fertilizer arrears. However, adjusted for expected asset monetization, FY22BE deficit is less pro-cyclical at 7.8% vs. 9.8% in FY21E. Tax revenue assumptions are rather conservative and could surprise to the positive. The disinvestment target of Rs1.7tn and the mix of capital and current spending also appear reasonable.

Government Capex/GDP shoots up to 2.5% in FY22BE; Including IEBR, Capex growth modest

The spending mix has favored capex (26%yoy+some policy innovations) over revex focus (-3%yoy + lower outlays for rural schemes amid fading pandemic impact). FY22BE Capex/expenditure at 16% (12.7% in FY21) is the highest since FY08. However, including IEBR, the capex numbers look less robust, seeing 5% growth from 11% in FY21RE. That said, innovative funding levers such as DFI, if successfully implemented, could have a much higher multiplier effect on infra financing in the medium term. Meanwhile, Revex focus continues on healthcare, while the subsidy bill will come down in FY22BE.

Net market borrowings to remain elevated at Rs9.25tn; Pressure on bonds to remain

After having slipped in FY21 revised borrowing targets by Rs800bn, FY22BE Net/Gross borrowing remains elevated at Rs9.25tn/Rs12.05tn. This implies RBI support in the form of OMOs will be required to maintain demand-supply balance. Amid massive supply, the evolution of G-sec demand outlook ahead will become crucial. With liquidity normalization picking further pace by mid-CY21 and policy rates likely having bottomed out, the appetite for duration risk on G-sec will likely fade. Thus, RBI support in the form of OMOs will be required to maintain demand-supply balance. We expect actions such as Operation twists/OMOs will continue to smoothen the distribution of liquidity across the yield curve and will reinstate the RBI’s preference for curve flattening. The upcoming MPC policy will likely reinstate we are still far from a state of financial tightening, which is neither optimal nor desirable at the current juncture. We reckon coordinated fiscal and monetary stance as the need of the hour to catalyze a nascent growth recovery.

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