▶ Capital-intensive sectors get boost: Consumer demand likely to take a hit owing to reduction in overall government expenditure

Consumer demand likely to take a hit owing to reduction in overall public expenditure

The Budget, with its emphasis on capital expenditure and infrastructure projects, is a boost for capex-related companies but this has been tempered by a reduction in overall government expenditure in FY22.

The latter could dampen the pace of consumer demand in the next fiscal year and is negative for companies in the FMCG, consumer durables, and automotive sectors.

Gross Budgetary support for capital expenditure is up 26.2 per cent in the Budget estimates for FY22 compared to the revised estimates for FY21. The Budget has allocated ~5.54 trillion for capital expenditure in FY22 against the actual capex of ~4.39 trillion in FY21 and ~3.35 trillion in FY20.

“The government has reprioritised public spending towards capital expenditure and infrastructure projects in FY22. This will aid economic recovery next year and is also positive for the corporate sector,” said Devendra Pant, chief economist, India Ratings.

This, analysts say, will boost the order book and top line growth for companies in the engineering, construction and capital goods sector.

Not surprisingly, Larsen & Toubro, the country’s top infrastructure company, was among the top gainer on the bourses on Monday. It was up 8.6 per cent. NCC was the top gainer in the infra space and closed the day with an increase of nearly 14 per cent, followed by Ashoka Buildcon (up 11 per cent) and KNR Construction (up 10 per cent). The BSE Infrastructure Index was up 5.6 per cent and closed the day at a fresh 52-week high.

In the capital goods space, Siemens was the top gainer with 5.6 per cent rise, followed by Bharat Heavy Electricals (up 5 per cent).

The Budget proposals are also positive for industrial commodity sectors such as metals and cement.

“Increased capex in the infrastructure sector, including the health care infrastructure, will have a multiplier effect as it will create demand across product categories, including steel,” T V Narendran, chief executive officer and managing director, Tata Steel.

PSUS to cut capex in FY22

The fiscal multiplier is, however, likely to be tempered by a cut in capital expenditure by central public sector companies including those under the Ministry of Railways.

The public sector undertakings (PSUS) under ministry plan to reduce their capex by 18.6 per cent year-on-year in FY22 while other PSUS are expected to cut their capex by 7.4 per cent y-o-y in FY22. AS a result, overall public sector capex is budgeted to rise by a modest 4.8 per cent in FY22 over the revised estimates for FY21.

Public capital expenditure is budgeted at ~11.37 trillion in FY22 against the FY21 revised estimates of ~10.84 trillion and ~9.77 trillion in FY20.

Overall the Budget is not expansionary compared to the level of public spending in the current financial year.

Central government expenditure is budgeted to rise by just 1 per cent y-o-y in FY22 over FY21 revised estimates. And net of interest payments, government expenditure is expected to decline by 3 per cent in FY22. Interest payment is expected to grow by 16.9 per cent in FY22. In comparison, central government gross tax revenues are expected to grow by 16.7 per cent in FY22. “If tax revenues grow faster than public expenditure, there could be a negative impact on aggregate demand,” said Madan Sabnavis, head economist, CARE Ratings.

This is expected to dampen consumer demand in the economy. This could explain the poor show by consumption-related stocks on the bourses on Monday.

Agro-chemicals maker UPL was the top loser and was down 4.43 per cent, followed by Dr Reddy’s Lab (3.7 per cent), Cipla (2.4 per cent), and Hindustan Unilever (0.4 per cent).

The BSE FMCG index was an underperformer on Monday with gains of just 1.81 per cent against a 5 per cent rally in the BSE Sensex.

The BSE auto index also lagged with gains of 4.2 per cent.

The Budget impact on corporate earnings in FY22 is likely to be neutral, given that capex-related stocks have a small share in corporate profits. Most of the corporate earnings is accounted for by top companies in technology, retail lending, FMCG, oil and gas, automotive and pharma sectors.