With the India Budget 2021 stocks and market sentiments have taken a U-Turn. Investors were not expecting a pro-growth, pro-development stance from the government particularly coming after a devastating covid-19 pandemic. But the Budget has shut out the naysayers, and how!
With enough and more elbow room of covid-19, Finance Minister Nirmala Sitharaman grabbed the opportunity to pump the economy with enough fiscal stimulus. The thrust towards infrastructure development is among other things, one of the best moves of the FM.
The elevated fiscal deficit of 6.8%, which would have otherwise unnerved the market at any other time, is being seen as just the right medicine. It could even fire up a broader economic revival sooner if the plan can be followed by swift execution.
A higher fiscal spend particularly towards infrastructure may help to see more trickle-down effect in the economy to the lower strata of society through better job creation, and more income.
Higher spends from the budget will be going towards capital expenditures. In fact, the Street sees a 25% increase in capital expenditures, which is a huge boost for infrastructure.
Then again, for the banking sector, the infrastructure push and the setting up of a bad bank could are signalling a huge shift in business. Banks could potentially offload about Rs 2-3 lakh crore to bad banks and asset reconstruction companies. This would free up much needed to capital and increase lending towards much-needed sectors, ramping up growth.
Selling off two PSU banks took the Street by surprise. Besides, raising the foreign direct investment limit in insurance companies from 49 to 74% can bring in better valuations for the sector. This may be with an eye on the LIC IPO that is slated to hit the markets this financial year.
GOOD FOR EQUITIES, BUT NOT BONDS
Stock markets are priming up for steady gains as earnings boost due to rising incomes becomes a reality. On the other hand, higher government borrowing may tend to crowd out the private sector, so that could be a negative for stocks.
But suffice it to say that interest rates could rise slowly, and that would be negative for the bond investors through mutual funds as net asset values of fixed income could shrink.
Strategic disinvestments will continue with the government planning to raise as much as Rs 1.7 lakh crore in FY22. Some high-profile divestments are on the cards, and hence keeping the market sentiment high is just the right medicine.
Budget 2021 stock winners could largely come from the infrastructure and cyclical space, and not some of the high-flying consumer names.
Capital goods sector will see a boost given that the budget envisages a large infra spend and setting up of a development financial institution. Zero-coupon bonds can further uplift the sector, and this could be incrementally positive for companies like Larsen and Toubro Ltd.
The new scrappage policy in the auto sector will be introduced, which is good for the sector. This should see replacement demand picking up in autos.
And lastly, the government has not resorted to raising any excise duty on cigarettes, which is often seen when resources are tight.
Besides, the budget has also not taxed the capital market segment incrementally, which markets were worrying about.
All this puts stocks in a better position as an asset class. Risk appetite should be paramount though because at high valuation levels, choppiness is a given.
With all these positives, it is a no-brainer that the stock markets may remain in a buoyant mode.
