There was no option for the Finance Minister but to “bite the bullet” to allow significant overshoot in fiscal deficit as % of GDP (beyond FRBM tolerance zone of 2-3.5%) when in risk of FY21 RE likely to spike into double-digit (now pegged at 9.5%). When into such a precarious situation from banking sector & Covid pandemic impacted contraction in GDP (FY21 GDP pegged at -8%), Budget2021 focused on higher capital & revenue expenditure, while being optimistic on revenue collections & disinvestments, pegging FY22 BE of fiscal deficit at 6.8% of GDP with road map towards 4.5% by FY26, review of FRBM tolerance zone at 4.5-8%. Be that as these may, conviction to present a growth oriented budget to ensure output expansion & job creation despite the devil’s advocacy of implementation risk factor is laudable.
What are positive vibes in Budget2021?
Budget2021 priority on “Health & Wellbeing” post-Covid is in order, with coverage around systems, nutrition, water supply, Swachch & Swasth Bharat, clean air, vaccines and scrapping of old vehicles, but the pleasant surprise is from 137% increase in budgetary allocation for FY22 at ₹2.24 lac Crores against FY21 at ₹95 lac Crores.
The emphasis on manufacturing sector is critical when India is in the mode of attracting companies that are exiting from China to elsewhere. It’s also important for India to gear up for domestic production for substitution of imports. Given these requirement, higher focus on AtmaNirbhar Bharat – PLI (Production Linked Incentive) scheme was looked for, and got modest allotment of ₹40K Crores for FY22. Emphasis on textiles with launch of Mega Investments Textile Parks to boost exports is good for SMEs and job creation.
Focus on infrastructure is on expected lines with marginal expansion in National Infrastructure Pipeline (NIP). It’s good that infrastructure-build will be multifaceted approach: (a) creation of institutional structure to attract co-lenders from financial institutions (b) monetisation of cash flow generating & other assets by NHAI, Railways, Airports etc., and (c) enhanced capital expenditure allocation in Central & State budgets. Relaunch of infra focused DFI is on expected line, with token allocation of ₹20K Crores as capital with ambition of building credit portfolio of minimum ₹5 lac Crores in 3 years. Launch of InVit and REIT to promote & attract debt flows into infrastructure and real estate didn’t have the desired results from domestic investors, and now being opened up to FPIs to attract offshore liquidity is step in the positive direction when foreign investors look for yield pickup assets in emerging assets.
It’s on expected lines to see jump in capital expenditure with 35% increase to ₹5.54 lac Crores in FY22 and additional ₹2 lac Crores to be available from budgets of State Governments. The capital-spend across road & highways infrastructure, Railways, Urban, Power, Port, Shipping, Waterways etc will help to build virtuous cycle between output, employment, consumption and wealth creation.
Banking sector stability is one of the key demand from stakeholders post NBFC-led NPA woes and capital-starved PSU banks. The demand for set up of “Bad Bank” is addressed by set up of ARC-AMC combined entity. The intent & criticality of recapitalisation of PSU banks is conveyed through allocation of ₹20K Crores for FY22, and set up of infra focused DFI & opening up of foreign investments in InVIT/REIT are big boosters for banking sector.
What are the concerns?
To avoid high FY22 BE on fiscal deficit at 6.8% of GDP (below FY21 RE of 9.5%), Budget2021 has pegged disinvestment target at ₹1.75 lac Crores and ₹12 lac Crores of market borrowings. There’s fear that FY21 deficit could overshoot into 10% inclusive of ₹80K Crores borrowing in rest of Q4/FY21.
Risk mitigation to be under 6.8% on fiscal deficit is to outperform in FY22 GDP growth with expectation pegged at 10-12.5% against lower base of FY21 contraction of around 8%, with the need to quickly surpass GDP top-line output to over ₹200 lac Crores to be in pursuit towards ₹350-400 Crores by FY26 for $5 Trillion economy, which is essential to achieve ambition of 4.5% fiscal deficit by then.
What could be the reaction of global rating agencies and foreign stakeholders on upward shift of “normal” on fiscal deficit from 3% to 7% when it’s not “given” that GDP growth could sustain above 7% till FY26? Need to believe that rating agencies will not react with downgrade, impact of which cannot be wished away. When in high dependent of foreign debt & equity capital, need to retain investment grade rating with neutral to positive outlook. When interest rates are set to harden making medium/long term borrowing costly, can’t afford to have destabilising exchange rate dynamics.
All combined, concerns remain from elevated fiscal deficit (struggle to avoid overshoot), confidence level to achieve double–digit growth, RBI’s ability to manage price stability in interest & exchange rate markets and last but not the least “bolt from the blue” from global rating agencies. So, undertone is mix of caution & optimism with belief that worst is behind and the best is not far away!
What’s the impact on financial markets?
Major beneficiary is the banking sector getting all that was expected – Bad Bank, DFI and recapitalisation to cheer up PSU banks. Given the top priority agenda of sector consolidation, private sector banks will gain valuation – either as suitors or ready for merger. It’s not that all is well as concern remains from post-Covid NPA/PCR and and now new problem from market risk on investment portfolio as 10Y benchmark yield shift play from 5.75-6% to 6-6.25%. Impact on P&L from combination of higher credit cost and m2m provisions can be heavy on PAT/EPS. While long term outlook on Bank Nifty is good, no clarity as yet to get bullish on short term till Q4/FY21 financial results are behind, but there’s high level of confidence that strategic base stands shifted from 20350-20650 (of September 2020) to 29650-30000 (of January 2021) and have no clarity for staying invested above 32650-33000.
Nifty price short term stability is better at 13500-15000 but have no clarity on breakout bias either-way. Undertone remains on buy dips mode while 13500-13650 remain safe and risk-light position at 14650-15000.
It was advised to stay away from fixed income/debt markets in anticipation of 10Y benchmark yield upside break at 5.75-6% which is done now, but need RBI’s solid support to retain play at 6-6.25% to absorb borrowing of ₹80K + ₹12L Crores from now to end of FY22.
It’s tough for investors to decide where to put monies – equities (when at all-time high valuation) and Gilts (when the worst is yet to come) when short term rates are at low. It’s toss up between staying on to low yield (without capital loss) or stay invested for combination of external liquidity & domestic growth driven valuation. Both options have for & against rationale, hence investment decision need to be based on risk appetite and reward comfort – in short, being prudent and not in greed when in cross roads!
Best wishes & good luck for rest of FY21
Moses Harding
