Vinod Nair, Head of Research at Geojit Financial Services
Undoubtedly, the government has decided to push the growth button instead of being cautious when the world economy is slowing, inflation is rising, and to bring populist measures when seven state elections are stated in 2022 post-budget. Capex and not the revenue expenditure, wholly oriented to build infrastructure and flourish long-term growth rather the balancing act considered current headwinds, economy & political wise. Massive growth of 35.4 percent in capital expenditure in a total expenditure plan of 4.6 percent. It is expected to trigger business growth for sectors like Infrastructure, Capital Goods, Industrial, Metals & Manufacturing, in the future.
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The common man & equity market was hoping for supportive measures. It was a need of the hour for rural economy, agriculture, low taxpayers & for sectors heavily impacted by the pandemic. High capex is essential, however, it is expected to benefit with a lag and lead to a consecutive tall fiscal deficit of 6.4 percent in FY23. High borrowing plans, in which gross G-Sec & T-Bills will rise by 32 percent in FY23. On the background of sticky inflation, high commodity & oil prices and rising interest rates can lead to challenges in the short to medium term.
India's real GDP growth is expected to be whooping 9.2 percent in FY22, which is a nominal growth of 14.5 percent, the fastest-growing amongst the largest world economies. However, the nominal GDP growth of FY23 is forecasted to lower at 11.1 percent, which presumes for a real GDP growth of about around 6.6 percent in FY23, if we assume a CPI of 4.5 percent. Are the forecast conservative or it is factoring moderation of world economic growth, as reiterated by IMF in the latest update. Global growth is downgraded to 4.4 percent in 2022 and 3.8 percent in 2023 from 5.9 percent in 2021. Strong two big countries, the US is lowered by 1.2 percent to 4 percent in 2022 due to drop in fiscal policy, withdrawal of monetary policy and supply issue. China is cut by 0.8 percent to 4.8 percent due to zero tolerance policy & financial stress.
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At a time when world economy growth is moderating the Government has decided to increase capital expenditure in FY23 to support the domestic economy. This will certainly help the domestic economy to decouple the world economy. Revenue from selling of 5G spectrum and divestment is a dark horse in the playout. However, time will tell us whether these measures well help the equity market to maintain its flourishing momentum, in the short to medium-term. The tall fiscal deficit, high inflation & borrowings will be a setback for bond market in the short to medium-term.
In the last one-month, Indian market had an intermediary rally and then a consolidation in context of global trend. During a week, we were in a pre-budget rally in anticipation of positive budget announcements and moderation in global geo-political risk. The budget is good for the economy, however, neutral for the equity market which are trading at high valuations. The overall performance of the broad equity market will depend on many non-budget factors like the performance of the global market, geopolitical issue, and state election outcome. Today, the Indian market has given a thump up to the growth-oriented budget today. However, volatility is also noticed in context to global trend, high fiscal & borrowing plans.
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The positive sectors based on high capex are Infrastructure, Industries, Cement & Capital Goods. While losers are FMCGs, Hotels, Media, and consumer sectors, in the short-term, in absence of supportive measures for rural market, healthcare, hospitality & low taxpayers.
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