Focus returns to capex-led growth
Infra nudge seen as serious attempt to kickstart revival
The Budget for FY22 scores high on many counts, if the Sensex’s 5-per-cent jump is any parameter to go by.
Not only has the finance minister taken the responsibility of government spending, but has also indicated to investors that a comeback for traditional brick-and-mortar sectors — infrastructure, metals, cement and allied manufacturing pockets — is on the cards.
This is a stark deviation in stance marking the reentry of infrastructure spending-led growth, as against consumption-driven growth for the past 10-12 years. Some experts say we may have gone back in time for good. The last time the Sensex rose over 5 per cent on Budget Day was in 1999, reacting to an ‘unexpectedly friendly’ Budget from Yashwant Sinha.
“To that extent, yes, I see a lot of similarity,” says Dharmesh Mehta, MD and CEO of DAM Capital. Further, he believes the consumption theme was nearing its peak. “Being a consumption-led economy has its limitations, and businesses such as infrastructure, manufacturing, construction, and metals have had to make a comeback,” he explains.
Terming it a serious attempt to revive growth, Pankaj Pandey, head (research) at ICICI Securities, says the multiplier effect that the infra nudge may have on the economy is about 1.4x the projected outlay. “The National Infrastructure Pipeline for FY21 is around ~7,400 crore, which could compound to ~20,000 crore of spending on a yearly basis,” he adds. The government opting to fund the infrastructure outlay through capital and revenue receipts, and not by increasing income tax rates (whether for individuals or corporates), comes as a major relief. The deviation in fiscal prudence is also noteworthy.
“The message is clear — growth is in focus and not fiscal deficit,” states Pandey.
While this is in line with the Economic Survey’s recommendations, the fact that the rupee didn’t react negatively to the huge fiscal deficit estimate of 6.8 per cent of FY22 gross domestic product (GDP) suggests that the markets may not view the approach adversely for now.
The government’s focus on infrastructure may eventually nudge the return of private capital expenditure; a factor not priced in for now.
A senior head of strategy research, in a domestic advisory firm, says this could be another 12-18 months away, once revenue growth trickles down to capital spending. However, despite a 34 per cent year-on-year increase in capex, he points out that infra expenditure, estimated at 16 per cent of FY22’S total expenditure, is lower than FY21’S 18 per cent. “Though we are directionally there, I would have wanted to see it at 25 per cent,” he explains.
While infra majors such as L&T and Siemens saw their shares gain 6-8 per cent on Monday, the Nifty Bank — with gains of 8.3 per cent — touched a new high, crossing the 33,000-mark, as bank stocks stole the show.
With growth in retail business tapering, banks are once again bracing for demand from corporates. With several reforms in the infra space rectifying past deficiencies in aspects such as right of way, equity participation in public-private partnership projects and determination of project milestones could once again motivate banks to relook the lending to infrastructure companies.
“These could ensure that past mistakes may not recur,” said a senior bank executive. The addressing of legacy stress, too, puts banks in an advantageous position.
For investors, the Budget is only a long-term positive. The focus will shift back to fundamentals and as Mehta explains, the Sensex had fallen more in the past week than it recovered on Monday. “For the market to find its feet, earnings growth matters,” he emphasises.
The December quarter or Q3 results have been a mixed bag and, hence, the March quarter or Q4 results and management commentary will be critical to determine the market trajectory in the medium-term.