By: Nikhil Kamath
The budget saw the government provide the much-needed fiscal push for economic growth. The equity markets cheered the budget announcements zooming over 4% on the day. The biggest positive for the market seems to be a lack of any particular bad news. There were fears of an increase in capital gains tax or a Covid tax on corporates and these pre-budget anxieties among investors had pulled the indices down the week leading up to the budget. The Rs 5.4 lakh crore capital expenditure estimate focuses much of its attention on the infrastructure sector. The announcement is a welcome boost for the sector in desperate need of capital. A meticulous and quick implementation of these initiatives is key to reviving the sector and leading the economic recovery.
The foreign inflows into the Indian equity markets have been highest for the second year in a row among emerging markets. With a growth focused budget, this trend is likely to continue again in 2021. The equity markets seem to have factored in all the good news on the vaccination front, the improved growth projections. There are real overvaluation fears in the equity market and the successful execution of the capital expenditure and divestment plans will be crucial for capital markets.
The banking sector rally was predominantly fuelled by the announcement of setting up of a stressed asset company to consolidate and take over stressed assets of banks, recapitalization plans and a growth-oriented budget. The privatization of two public sector banks is a welcome step on the road to further privatization of the sector. The privatization drive in the sector will be a big boost for the banking ecosystem hopefully leading to better lending practices. The decision to hike the FDI limit to 74% from 49% in the insurance sector is a welcome boost for the sector faced with stagnating growth and desperate need for capital infusion.
While the primary focus was on urban infrastructure spending, an increased allocation of Rs 40,000 crores to the Rural Infrastructure Development fund will have a significant impact on the agritech players. The troubled auto industry saw some cheer with the voluntary vehicle scrapping policy. The industry stung by downward spiralling sales is likely to benefit through improved sales and readily available scrap reducing import cost burden. However, the 20-year window for scrapping leaves too much room for uncertainty in the sector.
The budget indicates that the government has shed its fiscal conservatism temporarily and focus on spending to spur growth. The decision to keep tax rates unchanged is another decision that seems in line with economic expansion plans. One major cause of concern is the high rate of fiscal deficit and increased capital expenditure for the current year causing inflationary pressures and increased debt causing macroeconomic instability in the long-term. The execution of the divestment plan and effective capital expenditure are crucial for the government to bring the growth rate back to 7% over the next three years to compensate for the additional expenditure and bring fiscal deficit rates to its target of 4% by 2025-26.
(Nikhil Kamath is the Co-founder and CIO, True Beacon and Zerodha. The views expressed by the author are his own.)