S. Naren on Budget 2022: With increased capex, government puts growth ahead of fiscal consolidation

The fine print of the budget clearly indicates that the government’s focus is on the long-term growth drivers like infrastructure as it continues to prioritize growth over inflation. This budget has focussed mainly on capex led initiatives to push economic growth. So far, the government has been able to sail through the rough seas of COVID-19 phase quite remarkably as it managed to contain not only the fiscal deficit but also the current account deficit and inflation with the support of RBI’s monetary policy. Meanwhile, on the equity market front, the expectations remained minimal on the back of buoyant market and relatively robust economy and healthy projected corporate earnings growth.

Macros under control

While the macro parameters seem to be under control, the challenge has sprung up from the fixed income side. With the interest rates starting to edge higher in most parts of the world, the global picture is no more conducive. We believed there will be some steps taken to aid inclusion in the Bond Market Index, a step towards moderating the rise in interest rates. However, there was no announcement on this front. Apart from this, debt market was dismayed because the borrowing program for 2022-2023 is quite elevated. Both these developments together led to a sharp spike in yields. Hence, we believe the real risk to the equity market is likely to emanate from the bond market in the near term as the Government plans to borrow a record of Rs.14.95 lakh crore (around $200 billion) to bridge the revenue shortfall.

Through the various initiatives announced, it is clearly visible that the government is on the path of prioritizing growth over consolidation aided by the rising capex. This move is expected to help boost the growth rate of the economy and corporate earnings growth which in turn will help India to be one of the fastest growing economies among the major countries of the world.  The fiscal expansion is expected to be pro-growth, aided by a stable tax regime, impetus to digitisation of the economy, and focus on consolidation in taxation, all of which is expected to bode well for the equity market.

Investors should be mindful of the fact that in order to tame the surging inflation in developed markets, the global central banks are turning hawkish and are planning to raise the interest rates as early as March 2022. Along with this, the likely intervals between the tweaking of rates too seem to have narrowed down. The challenge of domestic interest rate trajectory is likely to persist amidst the gap seen between the local interest rates compared with global peers, and the elevated bond yields. This is at a time when the RBI is aiming to start with the rolling back of the stimulus. Therefore, any interest rate intervention should be facilitated via Government/central bank in the longer duration instruments. This would be a win-win situation not only for the economy but also for the equity markets, thanks to India's inflation rate which is not significantly high when compared with the developed markets.

In a crux, the Budget is a progressive continuation of the reforms announced earlier, a positive for the equity market.