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Union Budget 2021: Hike in capex will have a multiplier effect

All eyes will be on the RBI monetary policy later this week but as with all central banks we believe the RBI will remain accommodative and live with possible higher inflation.

Union Budget 2021: Hike in capex will have a multiplier effect
It estimates the aggregate revenue receipt of the states to grow 8.4% on year in FY22 from a decline of 0.6% in FY21. The revenue deficit is expected to be 1.5% of GDP in FY22.

Andrew Holland, Avendus Capital

If you would have asked what the market wanted from the Budget, namely a big capex increase for infra, huge divestment Budget and importantly no change in personal or corporate tax, then the finance minister delivered. Admittedly, expectations were running low and therefore no surprise that markets have given a resounding thumbs up. Undoubtedly, there will be concerns over the fiscal deficit remaining at higher levels but I think that investors will live with this on the basis that getting the economy kick-started for growth is far more important in the shorter term.

I think the key message from the Budget is the big push for growth. A 34% increase in capex across roads, power, water, railways etc was much higher than expected and not only is good for employment but will have a positive multiplier effect for the economy over the medium term. The tax for affordable housing was also extended and this again is positive for a market that is finally seeing traction after many years.

Other notable announcements were the establishment of a Development Financial Institute which will have a lending portfolio of `5 trillion, recapitalisation of government owned banks and an Asset Reconstruction and Asset Management company to help take on stressed assets. These moves together will be beneficial for the financial sector and more importantly free up bank balance sheets to help fund these projects.

The main concern for markets is the fiscal deficit target of 6.8% of GDP, which is way ahead of expectations of 5-5.5%. All eyes will be on the RBI monetary policy later this week but as with all central banks we believe the RBI will remain accommodative and live with possible higher inflation. If the government can capitalise on the strong equity markets and get some divestments under its belt quickly then the markets may feel less worried about the fiscal deficit. Indeed, the divestment target of `1.75 trillion looks achievable this time. Also, the monetisation of other assets could also ease borrowing concerns going forward.

For the first time in many years we feel this is a really good Budget. Right time, right focus and bold. Our view has been that investors will look to Asia (led by China and India) as the engine of global growth over the next 5 years or more and this Budget underlines India’s role in the growth story. There was a need to help build on the early stages of recovery being seen across most sectors and companies in India, and the government’s push to aid this will, in our view, give confidence to India Inc to move forward. Whilst many sectors will be the beneficiaries of this Budget, our over-riding stance is that as the economy recovers it will be the banking (financial services), industrial, energy and consumer discretionary sectors that will outperform. Moreover, this will also lead to a more broad-based rally than seen in previous years.

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