Union Budget 2022: A Stock trader's guide to what may happen today

The Budget is going paperless this year again with the government concerned about safety issues posed by the spread of the new variant of the coronavirus.

What’s the economic backdrop?

Decent but not great. Earlier this month, the first advance estimate of national income projected the economy to grow 9.2 percent in 2021-22 which will help the overall size of the economy to surpass pre-pandemic levels.

The International Monetary Fund, however, slashed its estimate for India’s GDP growth for the current fiscal to 9 percent from 9.5 percent due to the impact of the spread of the Omicron variant of the coronavirus across the country in the last two months.

The Reserve Bank of India in its previous monetary policy meeting was hard-pressed to state that the economic recovery is fragile in the face of threats from new variants and slack in demand.

The consumption economy remains lackluster with private consumption expenditure expected to be below the pre-pandemic level at the end of FY22. Several consumer-facing companies have already warned of a slowdown in the rural economy, a major driver of consumer demand growth.

What’s Dalal Street expecting?

Brokerage firm Morgan Stanley is counting on the government to walk the path of fiscal prudence after taking a detour last year due to the exigencies caused by the COVID-19 pandemic.

“The Union Budget 2022-23 is expected to be growth-oriented given the state election lined up in over five states in 2022. The consequent higher government spending on infrastructure development will help the economy gain further growth momentum,” said brokerage firm Axis Securities in a note.

Capital expenditure will likely remain the focus of the hour given the government’s reluctance to blow the coffers to provide direct support to consumers, who have been hit hard by the vagaries of the pandemic.

What does Main Street want?

Support for the consumer economy. Hindustan Unilever’s Chief Sanjiv Mehta, in a post-earnings press conference, urged the government to put more cash in the hand of the consumers and continue existing schemes brought out during the pandemic to help the most vulnerable sections of the economy.

“The Union Budget could focus on addressing some of the disparity with income segments and sectors through incentives and policy initiatives, especially given the weak rural demand ahead of the elections in key states in the coming months,” brokerage firm Sharekhan said in a note.

Former RBI Governor D Subbarao told PTI that government should focus on bridging the widening inequality caused by the pandemic, which could dent long-term prospects of the economy.

What will move the market?

* Fiscal deficit target: All eyes of the global investment community will be on the fiscal deficit target of the government. The surge in tax collections and higher nominal GDP means the government could report a lower fiscal deficit for 2021-22 as against an estimate of 6.8 percent.

Economists expect the fiscal deficit target for 2022-23 to be around 6 percent. A lower target is also crucial to appease foreign investors, whose help the government needs for inclusion in the global bind indices.

* Capital expenditure: With the government expected to retain its focus on boosting investment in the economy, economists expect a 20 percent growth in Budget estimate for capital expenditure in 2022-23 to Rs. 6.5 lakh crore. Government capex has taken more importance given sluggish corporate credit growth in the country, which reflects the reluctance of India Inc to spend big on capacity enhancement.

* Divestment target: The Center is most likely to miss the target of Rs. 2.1lak crore for divestment receipt for 2022-23 with the IPO of Life Insurance Corp still hanging in the balance. The Street will expect another year of high divestment target since many of the privatization targets of this year will be rolled forward. That said, new targets for divestment will be keenly watched out for including some PSU banks.

* LTCG: Recent rumours of a possible hike in long-term capital gains tax on equity investment have unnerved some investors. No news on this front could be a catalyst for some relief rally in the market, while any increase in tax rate from the current 10 percent will be met with disappointment.

* Rural spending: Allocation toward the rural sector may not increase significantly, said brokerage firm Nirmal Bang Equities in a pre-Budget note. However, economists expect the government to extend many of the loan-guarantee schemes for small businesses and improve outlay on fertilizer subsidy and MNREGA.

How are major players positioned?

Foreign investors are heading into Budget day with net short positions on the Nifty 50 index and have been net sellers in the cash market for four consecutive months.

On the other side, retail participants remain gung-ho despite the hammering taken by smallcap and midcap stocks in the past few sessions. Retail clients hold net long positions on the Nifty50 index’s February futures contract ahead of the Budget.

Domestic institutional investors have been subdued in January after investing over $8 billion in the cash market in the December quarter.

Which stocks/sectors to watch out for?

Cigarette stocks: With the threat of an increase in taxation on tobacco products looming large in the backdrop of the new government panel formed to look into cigarette taxes, shares of cigarette makers like ITC and Godfrey Phillips will be in focus.

Cement, building materials, steel: Tax break on rental housing and higher outlay on affordable housing could prove to be a catalyst for cement companies and building material companies as it could boost construction activity in the real estate space.

Capital goods, L&T, road construction: Higher government outlay on capital expenditure will provide impetus to shares of Larsen & Toubro and other capital goods manufacturers like Siemens. Further, a higher outlay on road construction with infrastructure allocation would boost road constructions companies like Dilip Buildcon, IRB Infrastructure, and Ashoka Buildcon.

Fertiliser producers: Shares of Coromandel International, PI Industries, UPL, and Rallis India could get a fillip from the higher allocation for fertilizer subsidy in the Budget.

Automobile: The budget is expected to provide incentives for the purchase of electric vehicles that could boost shares of Hero MotoCorp, Bajaj Auto, Tata Motors, M&M, and auto ancillaries like Sona BLW Precision and Minda Industries.

PSU banks/CPSEs: New targets for privatization as well as an announcement on increasing the foreign investment limit in public sector banks will boost stocks in this space.

Tata Power, Adani Green, and RIL: With the announcement of the Carbon Zero goal for 2070, the Budget could provide impetus to the renewable energy sector which will be positive for stocks like Adani Green, Tata Power, and RIL. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.