Execution key to sustained rally
The market response to the Budget was positive, partly due to the fact that no new taxes were imposed. There was also appreciation for some policy measures. Budget 2021-22 has a strong focus on infrastructure creation, with many new roads projects announced, big allocations for urban waste management and water supply, and urban transport solutions.
Infrastructure asset monetisation could help to ease stressed finances in the sector. Infrastructure creation inevitably means construction, and that in turn means employment opportunities, as well as higher offtake of commodities such as steel and cement.
The establishment of a development finance institution to handle infrastructure financing may or may not help in funnelling funds to critical sectors. The policy announcement that the power distribution sector will be freed up is interesting but we will have to see what happens on the ground.
A new vehicle scrapping policy was announced, but it’s short on details. In the immediate future, it is unlikely to drive demand for vehicles but it’s a good long-term step for the auto-ecosystem.
Seven new mega-textile parks will be set up. The key to success here would be to reduce costs in these establishments. India has a substantial and wellestablished textile industry but it needs to compete with Bangladesh and Vietnam on costs to grow and grab export market share. In addition to the above sectors, the health care budget has been substantially expanded (apart from an allocation of ~35,000 crore towards the Covid vaccination programme). This will also translate into growth for the health care and pharma sectors.
On the disinvestment front, the government hopes to make up for lost time. It has pared down expectations, but with the market riding high, it should be able to get the programme moving. The Life Insurance Corporation IPO would be critical to raising the ~1.75 trillion earmarked for the programme. The government has also pared down expectations from spectrum auctions — this is sensible. Attempts to attract investment also include the hike in foreign direct investment limits in insurance.
There are serious worries about government finances and about the bank recapitalisation allocation of just ~20,000 crore. This is unlikely to be enough to put banks back on a healthy footing, since bad loans are guaranteed to spike to record levels in fiscal 2020-21. An asset reconstruction company to take over bad debts may work in terms of quicker resolution, but banks will take big haircuts.
The fiscal deficit hitting 9.5 per cent in 2020-21 is scary but not surprising, given the contraction in GDP. The Food Corporation of India subsidy is included in this estimate for the first time, which means it is not like-forlike. However, government borrowing will clearly rise substantially, and that could crowd out private borrowings. The creation of a bond market mechanism where the government would purchase investment grade securities is an interesting idea. Will it be enough to maintain liquidity?
Higher customs duties across the board (except for gold and silver) is a bad idea. Most imports drive economic activity, and hiking input costs for everyone, including the end-consumer, in the name of self-reliance has never been a good strategy.
The market dynamics are positive at the moment, but valuations are extremely high. Over the last four months, the bull-run in Indian equity has been driven almost totally by the foreign portfolio investors’ buying of over ~2 trillion. Domestic institutions have been net sellers and equity mutual funds have seen net redemptions. A turnaround in domestic sentiment is vital to sustain this rally. For that, we’ll need to see policy translate into action on the ground.
THE GOVERNMENT’S BORROWING WILL CLEARLY RISE SUBSTANTIALLY, AND THAT COULD CROWD OUT PRIVATE BORROWINGS